After covering the commencement of Musharakah Inan or Sharikat Al Aqd (contractual partnership) in the last article, I would now like to explain how such a Musharakah functions.
I would like to talk about a point mentioned in the last article (110) that a debt payable by one partner to the other cannot be considered as part of the Musharakah capital. That is true. However, what about the assignment of third-party debt in favor of a partner? Can a partner make a contribution to the Musharakah capital by way of assigning payment of trade receivables which are due in the near future?
Yes, that is permissible but as I had explained in the last article, the Musharakah will not be able to commence operation until all partners have completed the contribution of the agreed Musharakah capital. Imagine a situation where one partner has paid its share of the capital upfront to commence the Musharakah operation and the profit has started to pour in, yet the Musharakah is waiting to receive the realization of the second partner’s debt.
Do you think it will be fair to apply the agreed profit distribution ratio on the profit amount earned for the period when only one partner’s capital was deployed? It is therefore required to sign the Musharakah agreement and commence the Musharakah operation only upon the completion of the payment of each partner’s capital contribution.
There may occur situations in the Musharakah which are pure conflict of interest for a partner. This is particularly true if they have the previous background of working in the same line of business as the Musharakah (hence they are partners). At times, it becomes too tempting to conclude transactions outside the Musharakah, ie not let the Musharakah benefit from the transactions since the profit shall be subject to distribution.
To avoid such anomalies, the Shariah principles have termed the Musharakah as the trust contract wherein all partners are trustees to one another. Also, it is permissible that the partners may provide a personal guarantee to one another which works as a restraining tool from crossing the ethical line. What if a partner does not agree to provide his personal guarantee to the other partners but offers to provide a third-party guarantee?
There is no restriction on receiving such a third-party guarantee by the Musharakah provided that it does not guarantee the profit payment and only covers the payment in case of a loss to the Musharakah arising out of the negligence of the partner being guaranteed by the third party. As such, the guarantee shall not be called in case of a genuine loss.
Similar to a Mudarabah contract, in Musharakah too the profit distribution arrangement shall be set in ratios and not in a sum which makes it a Ribawi transaction. If a Musharakah contract states that the partners shall decide the profit distribution ratio at the back end, ie at the completion of the Musharakah term, such a contract shall be deemed void in Shariah.
However, not mentioning the sharing of losses in the Musharakah contract does not make it invalid owing to such percentages are implied to be directly related to the capital contribution ratio. Another point worth mentioning here is the Shariah permissibility for a voluntary grant of the profit by one partner from its share to another. Such a situation arises if a passive partner would like to incentivize the managing partner.
I have seen the voluntary grant in many transactions where the Islamic bank enters into a Musharakah agreement with a customer with the clause that the customer (being the managing partner) shall be granted a certain incentive by the bank pursuant to the distribution of profit between the partners. Such a clause is added to satisfy the customer that in monetary terms, the Islamic bank shall not take more than what the customer would have paid to a conventional bank had the customer sought the banking facilities from it.
Kindly note that there is no Shariah bar if the partners decide halfway in the Musharakah term that they would like to change the profit distribution ratio. It is ok to change your mind provided the amendment is not applied from a retrospective effect so as to be fair to the partner whose ratio of sharing the profit is being reduced.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Detailed scrutiny of Musharakah shall continue.