Glenn Stewart Observer

EXAMINING THE ISLAMIC CONCEPTS OF OWNERSHIP, PARTNERSHIP AND EQUITY HOLDINGS FROM A WESTERN PERSPECTIVE

December 7, 2011adminBusiness and FinanceComments Off on EXAMINING THE ISLAMIC CONCEPTS OF OWNERSHIP, PARTNERSHIP AND EQUITY HOLDINGS FROM A WESTERN PERSPECTIVE

By Glenn M. Stewart

In this paper I will examine concepts of ownership or equity under Islamic law from a Western perspective.

As with most aspects of financial transactions taking place in an Islamic context, the first point of reference for any Western businessman or business institution must be the Shari’ah law. Without a comprehensive understanding of the basis and implementation of Islamic commercial law – known as fiqh al-muamallat – to commercial transactions, it is impossible to operate effectively in this growing and important industry.

My main purpose herein is to attempt to provide the reader with an overview of the salient features of Shari’ah law as it applies to concepts of ownership in a commercial business context, and to identify how those concepts of ownership can form the basis of general industrial, commercial, agricultural, finance or insurance businesses.

I have relied heavily on two excellent books published in this field: the first is entitled Unlawful Gain and Legitimate Profit in Islamic Law by Nabil A. Saleh of SOAS, and published by Graham & Trotman; the second is Partnership and Profit Sharing in Islamic Law by Nejatualih Siddiqi, who is a Faisal laureate in Islamic Economics and teacher at King Abdul Aziz University in Jeddah, and is published by The Islamic Foundation in Leicester.

To begin, it would be valuable to present the framework concerning concepts of ‘ownership’ and ‘equity’ as they exist in Islamic law, which is of particular benefit to those examining this industry for the first time.

Regarding the general concept of ownership and the right to hold property as it exists within Islam, let me quote from The Economic Teachings of Prophet Muhammed (may peace be upon him). A Select Anthology of Hadith Literature on Economics edited by Muhammad Akram Khan and published by The International Institute of Policy Studies in Islamabad.

 ‘The property relationships define, to a large extent, the contours of an economic system. The two dominant systems of the present age differ from each other, largely, by the extent of freedom of an individual to own private property. Islam offers a third point of view: Everything in this universe belongs to God Almighty. He is the real owner of everything and has the right to determine the mode of utilization of all forms of property. Man is His vicegerent (khalifah), who has been entrusted with certain responsibilities. To carry out his responsibilities, he has been endowed with requisite facilities. These facilities are only a trust with him and are strictly meant to be deployed for the purpose they have been granted. The purpose has been defined in elaborate details in the Shari’ah revealed to the Holy Prophet (may peace be upon him).

‘Thus, subject to the sovereignty of Allah, man has been granted the right to own property. As man is its ultimate owner, so the mode of its utilization has also been defined by the real owner, (i.e. God Almighty). At the termination of his worldly life, everyone shall have to account for the resources provided to him in this worldly life and placed at his disposal as vicegerent to Allah. Man can withstand the test of accountability only if he has certain discretion to use these resources; therefore although the requisite mode of utilization of these resources has been laid down in the Shari’ah, man has been granted the freedom to act in any other way, if he so chooses, at the risk of severe punishment on the Day of Judgment. To ensure an uninterrupted discretion to use these resources, the Shari’ah has recognized the right to own property as legitimate and authentic, this right has been conceived in the overall framework of God’s sovereignty.

‘The Holy Prophet (may peace be upon him) has declared the sanctity of private property but this sanctity is in man’s position of being Allah’s vicegerent.

‘Islam has also recognized a right of common ownership in certain things such as water, grass and fire. They are for common good and cannot be owned by anyone, including the State. Instead everyone is equally entitled to derive benefit from them.

‘In the present day context, it may well be inferred that the resources that may be required by the general public may not be owned privately to relieve people of the possible hardships. This does not necessarily mean that such resources would be owned by the State. Instead the ownership in this case lies with the whole of the Ummah (The Islamic Community) and the State may manage them on its behalf, as a trustee and is accountable to them.’

In order to structure ownership of assets into a joint holding, there are two forms of partnership structures permissible under Islamic Shari’ah: Shirkah and Mudaraba.

Shirkah covers several modes of partnership and has some variant forms, but the primary type is shirkat ‘inan, which refers to a partnership where there is equality in one or more factors, but not in all aspects – for example, in this context, where profit is equal, but not labor. Shirkah can also be referred to as Musharaka.

In terms of asset partnerships, Shari’ah divides these into two broad categories: property partnerships (sharikat mulk) and contractual partnerships (sharikat ‘aqd). Sharikat mulk usually involves the joint ownership of a property without its joint exploitation, such as the joint ownership of a house transmitted by devolution to the heirs of a deceased person.

Sharikat ‘aqd emphasizes joint exploitation of capital; the joint participation in profits and losses; and where joint ownership is a consequence of, and not a prerequisite for, the formation of the partnership.

Sharikat ‘aqd is the main kind of partnership with which you need to be familiar. It is generally divided into three types:

1)  Finance Partnerships (Sharikat mal)

2)  Labour Partnerships (Sharikat a’mal)

3)  Credit Partnerships (Sharikat wujuh)

Each of these partnerships can be either unlimited, unrestricted and equal partnerships – defined by the Hanafi school of law as Mufawada – or a form of a limited investment partnership, known as inan.

The sharikat ‘inan is by far the more important partnership structure. This is a contractual partnership whereby two or more partners contribute to a capital fund, either in money, in kind, in labour or in combining all or some of these investments.

Partners in an ‘inan share the profits in the agreed manner and bear losses in proportion to their mutual contributions. Each partner is only the agent of, and not a guarantor for, his colleague(s), and this mutual agency is valid only in the area of business covered by the partnership or to the extent of their joint capital.

The agency that results from ‘inan is restricted to the partners’ relationship: for example, only the partner who has concluded a transaction can sue the party with whom he has contracted and the latter has no action except against the contracting partner. This is because an ‘inan partnership implies mutual agency, but not mutual surety. As a consequence, an individual partner does not become liable for that which is owed by his colleagues. Debts owed to, and by, each individual partner cannot be collected from, or claimed by, his associates.

Whenever partners have equal investments, they bear losses and share profits equally. Otherwise, profits and losses are borne proportionally to the size of the investment or the value ascribed to the additional effort made by one partner.

Thus sharikat ‘inan forms the basis for what we would regard as a joint company.

Before we turn to the second type of permissible contract, Mudaraba, it is worth exploring the variations between the different Islamic schools of law. As you may be aware, there are four main Sunni schools of law: Hanafi, Maliki, Shafi’i and Hanbali. In addition, there are several minor schools of law that can be described as orthodox as well as modern movements that are seeking to use individual reasoning, or ijtihad, to formulate new approaches and interpretations of legal opinions. There are also several heterodox schools of law in Islam, the most important of which is the Ja’fari school.

If we look briefly at the Mufawada, or unlimited partnership, you will be able to see how these differences in legalistic interpretation can vary from one school to another.

According to the Hanafis, the Mufawada is a partnership in which partners enjoy complete equality in the areas of capital, management and right of disposition. Each Mufawada partner is both the agent of and the guarantor for his colleague.

The Malikis hold the same basic concept of Mufawada as the Hanafis, but the Shafi’is consider Mufawada partnerships null and void because it is not practicable to implement the theoretical equality inherent in this kind of partnership.

The Hanbalis are divided: the jurist Ibn Qudama, for example, holds that a Mufawada partnership is only lawful when all of the elements of association are present and the Mufawada is a partnership of money, labour and credit; whereas another Hanbali jurist, Al Futuhi, regarded Mufawada in the same light as the Hanafis jurists; whilst a few Hanbali scholars also agree with the Shafi’i view and condemn this form of partnership.

The Ja’fari views on Mufawada are different yet again.

Similarly, there are differences of opinion concerning what can be contributed in the way of capital for the fund under sharikat ‘inan: for example, the Shafi’is (and the Malikis) will allow credit, but not chattels or labour; whereas for the Ja’fari’s, ‘inan is only valid whenever it takes the form of a finance partnership whereby the contributors offer ready cash or chattels.

Thus when seeking to structure financial transactions, including partnerships or other forms of ownership, it is important to know in which school the jurist being consulting received his training as that will have an effect on the nature of the opinion, or fatwa, given in respect of those transactions.

(However, since all opinions are fallible and not binding within the Sunni schools, it then falls to the judgment of the financier working with members of a particular shari’ah committee – a group of religious scholars who advise a company on whether its commercial activities conform with Islamic law and practices – as to which structure not only makes the most sense; but will also be accepted by the counter parties to the transaction.)

Now, let us first look at the second type of permissible contract available under Islamic law: that of Mudaraba, which, in many respects, is the main vehicle available for mobilizing surplus capital and channeling it into commercial activities. (It is worth noting that Islamic law makes no distinction between commercial and non-commercial partnerships: the same rules and principles apply to both.)

There is a general consensus among the various schools of law in Islam that a Mudaraba contract consists of a contract between at least two parties whereby one party, ‘the investor’, or rabb al mal in Arabic, entrusts money to the other party, who is the agent-manager or Mudarib. The Mudarib then employs the money in an agreed manner before returning the principal to the investor together with a pre-agreed share of the profits while retaining a pre-agreed share of the profits for himself.

This division of profits must be on a proportional basis and cannot be a lump sum or guaranteed return. The investor is only liable for losses to the extent of the capital invested. The Mudarib has no liability for any monetary losses, and would lose only his time and effort.

Parallels for this kind of structure exist in Western law, particularly in French law. This kind of partnership is known as a Commenda partnership and the French commercial company known as a Societe en commandite simple derives from the medieval Western Commenda.

Najib Saleh believes that it is possible that the Western Commenda itself was derived from the Islamic Mudaraba as a result of contacts and interchanges between Islam and the West in the early Middle Ages – in much the same way as the Crusades no doubt developed as the Christian response to the concept of jihad.

However, the commandite simple never became popular in the West as a vehicle for doing business, with the limited liability company, or societe a responsabilite limitee, and the joint stock company becoming the norm in Western commercial practice.

The commandite simple was mainly used as a family partnership, especially when a widow, children under age or incapacitated persons were among the partners.

In the Islamic world, however, Mudaraba is generally viewed to be the best means for raising funds from the public, and as a way of providing facilities and capital to businesses. All of the Islamic banks conduct their “deposit” taking activities under a Mudaraba contract and many of them then invest the funds through a Mudaraba structure.

The work entered into by the agent-manager, or Mudarib, and the risk taken by the investor are the justifications for the profit sharing applied to a given Mudaraba.

If an investor asks the Mudarib for a guarantee of any losses, the contract does not qualify as a Mudaraba. The only type of security that can be taken under Islamic law is against the risk of negligence or willful wrongdoing of the partner or against the partner’s non-compliance with the terms of the partnership contract. The business risk inherent in a partnership cannot be secured.

For Malikis and Shafi’is, Mudaraba activity is limited to trading and activities related to trade; it cannot involve the performance of manufacturing on the part of the Mudarib.

The Hanafi school, however, does not object to a Mudaraba wherein capital is involved in craft activities or manufacturing, such as when the Mudarib is entrusted with capital on the condition that he buys raw materials, turns them into finished products and then sells them on the basis of a profit sharing Mudaraba.

The Hanbali school allows the Mudarib and the provider of capital to enter into separate contracts – one of manufacture and one of Mudaraba – provided that one of the contracts is not a condition of the other.

The Ja’faris allow the Mudarib to be held liable if he receives money he is unable to use and the investor was unaware of the incompetence of the Mudarib. However, if the investor knew that the Mudarib was incompetent, then the Mudarib would not be liable. The Ja’faris also restrict Mudaraba to trading and its related activities.

Let us now examine what can legally constitute Mudaraba capital.

Obviously, money and specie are acceptable forms of capital that can be contributed to a Mudaraba. However, there is a small controversy over whether bullion can or cannot be used.

Interestingly, all the major schools deem chattels (‘urud) to be ineligible for contribution to a Mudaraba. This, in effect, means that capital in kind, or other forms of contributed capital, cannot be used as the basis for forming Mudaraba capital.

The reason for such rejection is that the price of chattels may well fluctuate between the date they are remitted to the Mudarib and the date of their conversion into cash. As a result, the Mudaraba becomes exposed to a risk of an undefined and undetermined matter, in addition to the fact that the Mudaraba starting-point is also uncertain for it is not known beforehand when the cash will be available. This involves a sufficiently strong element of gharar, or risk, to lead to a dispute. It was therefore decided that chattels were not a valid Mudaraba investment. However, there is a qualification to the unanimity shown by the schools of law: Hanafi and Hanbali teachings allow the setting up of a Mudaraba with the proceeds of the sale of specifically designated chattels once they are sold, but not before. Thus the capital on hand is the sales proceeds and not the chattels themselves. In this instance, the Hanafi and Hanbali view relies on their teaching that a Mudaraba may be made contingent upon the fulfillment of a pre-condition, which in this case is the sale of the chattels.

None of the major schools will allow the setting up of a Mudaraba between a creditor and a debtor by way of the creditor asking for the debt to be considered as a capital contribution. However, the Hanafis and Hanbalis do allow an agent-manager to be appointed to collect the debt and, once collected, for the proceeds to be used as the capital.

The Shafi’is seem to hold conflicting views on this: in his book Bidayat Al-Mujtahid, the jurist Ibn Rushd gives an opinion that it is permissible whereas the jurist Jaziri gives his opinion against the practice in his work Al-Fiqh ‘ala al-Madhahib.

The Malikis do not allow the practice as it adds an additional burden on the Mudarib and it gives the investor an illegitimate advantage (i.e. the work expended to collect the debt), which is neither a part of the capital nor a share of the profits.

When establishing a business management under this structure, it is also important to be aware that Mudaraba is not a binding contract, but a voluntary one, which ceases to exist with the death of the investor.

In a Mudaraba, both the investor and the Mudarib have certain duties and rights  although essentially, the only duty of the investor is to hand over the capital. However, since Mudaraba is not a binding contract, it can be terminated at any time and therefore an investor can take his capital back. This does not constitute a breach of contract. As a result, some Western lawyers view Islamic contract law as a branch of conveyance rather than as a full contract in the Western sense.

In addition, while the investor can take back his capital at any time, he cannot ask the Mudarib to guarantee it. According to Ibn Hanbal and Abu Hanifa, the condition is null and void, but the contract itself actually remains valid. However, both Malik and Al Shafi’i deemed that the whole Mudaraba contract would be invalid if such a condition existed.

One reason why such a guarantee is unacceptable is that the Mudarib, or for that matter any partner, is considered to be a trustworthy partner (amin) with respect to the capital remitted to him. As a result, he is not liable for any loss occurring in the normal course of the business activities except when there is a breach of trust. For example, a breach would occur if the Mudarib broke one of the agreed or implied conditions of the Mudaraba.

Implied conditions of Mudaraba vary in the different schools of law. They do not derive from the general Mudaraba theories that I have presented, but stem from what might be described as case law (although some of these are theoretical cases than have been analyzed in addition to actual).

As a general guideline, the legitimacy of the Mudarib‘s action can usually be measured against the customary practice of merchants. Thus if his actions are in conformity with those practices, the action is deemed legitimate and binding upon the investor unless it contravenes any of the specifically pre-agreed terms of the Mudaraba.

This criterion has been adopted by all of the schools of law except the Shafi’i school, which has a slightly variant approach that is essentially the same as the common-law doctrine of the prudent man. In other words, the Mudarib should act as any prudent man.

Nonetheless, each school has its own peculiarities and, as I have mentioned before, it is imperative to understand the scholastic training and background of a jurist when examining the legal structure of a particular Islamic transaction, especially when so few jurists have any specific training in the area of fiqh al-muamallat let alone any practical experience of modern commercial practices.

An example of a Mudarib acting outside the scope of the specific agreement of a Mudaraba contract would be the sale on credit of the goods being traded if the Mudaraba agreement does not specifically permit sales of this kind.

The Hanafi and Hanbali schools would allow such sales to take place without the specific agreement because credit sales are a customary mercantile practice. However, the Shafi’i and Maliki schools would deny the Mudarib the right to make such sales in the absence of a specific agreement to do so.

The investor also holds the right to a share of the profits, although the profit share must be determined on a strictly proportional basis otherwise the partnership is invalid.

A Mudaraba can also become invalidated if either of the parties stipulated that, as part of his expected return, he should be given a specific sum of money instead of, or in addition to, a proportional share of the profits. Such an arrangement would be invalid under the Islamic legal concept of gharar as the future existence of a lump sum is uncertain at the time when the promise to pay it is made, and the actual ratio to the real profit that will be earned is also unknown. The other reason such an arrangement is illegal is that it is not the business risk which is being rewarded under such an arrangement, but the mere act of remitting the money to the Mudarib. That then entails an exchange of cash against cash at unequal counter values and thereby introduces riba, or unlawful gain, into the contract, which is illegal under Islamic law.

It is possible under Maliki fiqh to deed all of the profits of the Mudaraba to either the investor or the agent manager provided it is done so as a gift.

The Shafi’i and Hanbali schools consider any clause securing all the profits for one party to the Mudaraba to be invalid because it conflicts with the objectives and essence of the Mudaraba concept – one purpose of which is to fix the profit sharing relationship between the capital and labour elements of the partnership

Hanafis hold the position that if all the profits are to go to the Mudarib, the contract is no longer a Mudaraba contract, but a contract of loan whereby the borrower is liable to refund to the lender the equivalent of what he has received. If all the profits are secured to the investor, the Hanafis hold that the contract is not a Mudaraba contract, but is instead an ibda’, which is a special form of contract wherein the capital is remitted to a person who trades it on the understanding that all of the profits will be for the account of the capitalist.

The Ja’fari position is essentially the same as that of the Shafi’is and Hanbalis.

The investor has a right to limited liability. Thus only the capital advanced by the investor is at risk. All of the schools of law hold that the Mudarib has no right to commit the Mudaraba to any transaction involving more than the total capital of the Mudaraba. If the Mudarib breaches this condition, he becomes personally liable for any commitment in excess of the Mudaraba capital.

It is worth noting that Islamic law does not envisage the separation of assets between the company and the partners as a way of defining liability among the partners and towards third parties. As a matter of principle, the liability of the partners in all Islamic partnerships, except for the investor in a Mudaraba, is unlimited. One Western scholar who has examined this area is Professor Udovitch, who looked at the application of principles of fiqh al-muamallat made by a number of the leading jurists. These concepts of unlimited liability, which affect the Islamic law of partnership, are different in respect of Mudaraba. That is why Mudaraba, although a permissible contract under Islamic law, does not fall into the more general area of Islamic partnership law. The investor is effectively screened by the Mudarib and can incur no further liability once the capital has been transmitted to the Mudarib.

There are various duties and rights held by the Mudarib. First and foremost, the Mudarib has to comply with the trust (amana) vested in him by the investor while conducting the Mudaraba’s affairs. He must comply with all of the terms of the Mudaraba contract and, if a problem arises that is not stipulated in the contract, the customary practice of the merchants should be followed.

As we have seen, these practices are not uniform among the various schools of law. However, all schools agree that the Mudarib does not have any authority to borrow on behalf of the Mudaraba unless he is specifically authorized to do so under the terms of the Mudaraba contract. This restriction is a corollary of the limited liability nature attaching to the investor under a Mudaraba contract.

The Mudarib cannot expend Mudaraba funds in excess of the total capital of the Mudaraba, even for expenses made necessary for the transportation, conservation, transformation or improvement of the Mudaraba properties. As we have seen, the Mudarib would become personally liable for any expenditures of this nature that exceed the Mudaraba capital. This is the only instance, besides violation of trust, when the Mudarib can become personally financially liable.

The Mudarib also has the duty to reconvert the Mudaraba investment into money. This is important because it is only when the Mudaraba investment is reconverted to money that the Mudaraba profits become available to the parties. In addition, according to the jurists, in this case Jaziri, Al-Shammakhi, Al Shafi’i and Ibn Qudama, the Mudarib must take his share of profits in the presence of the investor.

A question exists as to whether the liquidation of a Mudaraba is left to the Mudarib to assess the proper timing of the liquidation or whether it can be forced on him at a time he has not chosen or does not favor.

There are circumstances, such as the death or incapacitation of one of the contracting parties, which automatically result in the termination of the Mudaraba (although the Malikis do not consider the death of one of the contracting parties to result in the termination of the Mudaraba per se).

One problem that can arise in respect of the termination of a Mudaraba is that Mudaraba is a non-binding contract and, therefore, the investor can ask for his money back at any time. As a result, Mudaraba should be seen more in the light of a fiduciary relationship rather than as a partnership. There doesn’t need to be breach for the investor to withdraw his funds from the Mudaraba; he may do so at will.

That this loose, contractual arrangement can lead to potential conflicts, particularly when the Mudarib has to make decisions about when to buy and sell, did not escape the various schools of law, which resolved the problem in various ways.

The Hanbali and Shafi’i schools take the position that if the Mudarib takes a decision to sell the Mudaraba properties at an expected profit, but is instructed not to do so by the investor, the Mudarib can disregard the investor’s instructions and proceed with the sale. However, if the sale is not expected to produce a profit, then the investor is entitled to prevent it from taking place.

If the investor specifically requests that a sale of Mudaraba assets take place, the Shafi’i’s rule that the Mudarib is bound to accept the investor’s instructions irrespective of the potential profitability of the sale.

The Hanbali school, however, holds that the Mudarib would only be under an obligation to proceed with the sale if it is going to result in a profit.

The Hanafi position has some additional complexities, but basically they hold the view that the investor cannot force the Mudarib into selling Mudaraba properties, nor prevent him from doing so.

Malikis advocate that if a dispute of this nature arises, advice from a third party who is expert in these matters should be sought.

The Ja’fari school teaches that the Mudarib is bound to perform according to the instructions of the investor.

Thus the Islamic fiqh attempts to maintain a balance between various features of Mudaraba, namely: the recognized right of both the investor and the Mudarib to terminate the Mudaraba contract at will; the Mudarib‘s right not to be deprived of his expected share of the profits notwithstanding the investor’s decision to terminate the Mudaraba prematurely; and, finally, the investor’s expectation of getting his investment back plus his share of the anticipated profits should not be foiled as a result of the Mudarib unilaterally withdrawing from the Mudaraba at an improper time.

Thus the most appropriate way in which a Mudaraba is to be terminated would be through normal circumstances i.e. by the Mudarib selling the Mudaraba property at an appropriate time and returning the investor his capital and the profits earned thereon, or the portion due to him if a loss had been made.

Another question that has been examined by the jurists is whether a Mudaraba can be for a predetermined duration. The reasoning behind the acceptance of a predetermined duration is that, if the two parties agree that the Mudaraba will end after a fixed period of time, both are in a position to take all precautionary measures in order not to be taken by surprise by the deadline’s occurrence. However, even in a Mudaraba for a predetermined period, both the Mudarib and the investor retain their right to withdraw from the Mudaraba at will, And the Mudarib would, of course, be precluded from performing acts on behalf of the Mudaraba after the agreed time has elapsed. As such, the Malikis and Shafii’s refused to recognize the validity of a Mudaraba with a predetermined duration.

The Mudarib has the power to act with freedom in operating the Mudaraba within the agreed parameters. The investor may issue instructions and impose restrictions, which can have certain effects, but the Mudarib is essentially free to operate the Mudaraba as he sees fit. Equally, if the investor’s instructions have the effect of paralyzing the Mudarib’s freedom of action or of frustrating the agreed purpose of the Mudaraba, then those instructions are considered null and void.

There are, of course, differences in interpretation between the various schools as to what type of instructions render the Mudaraba defective. For example, the Hanafis, Malikis and Shafi’i’s agree that the investor cannot act in a capacity would entail actually working on behalf of the Mudaraba whereas the Hanbalis and Ja’fari’s acknowledge that the investor can give advice to the Mudarib to a reasonable extent.

The Mudarib has the right to deduct all legitimate business expenses incurred in running the Mudaraba from the capital entrusted to him by the investor. (cf. above: the Mudarib can deduct expenses from the capital, but he is personally liable for any expenses exceeding the capital.) There is a limit to his freedom to do so to the extent that he should conform to customary commercial practice and ensure that he is running the Mudaraba in accordance with his fiduciary trust to protect the capital.

All the schools agree on this principle. However, there are differences of opinion in respect of the treatment of the personal expenses of the Mudarib. The Hanafis hold that the Mudarib is entitled to reimbursement of his expenses if he incurred them on behalf of conducting the business of the Mudaraba. They are also of the opinion that the Mudarib’s right to this reimbursement does not need to be expressly stipulated in the terms of the Mudaraba.

The Hanbalis take the pragmatic approach that the personal expenses of the Mudarib are to be left to an understanding reached between the Mudarib and the investor.

The Shafi’i’s teach that the Mudarib cannot deduct his personal expenses unless the expenses are incurred during a business journey and the investor expressly authorized the Mudarib to deduct them.

It is necessary for the profit sharing arrangement to be spelled out in the Mudaraba agreement. All the schools agree that, unless the sharing is done on a strictly proportional basis, the Mudaraba will be invalid.

To conclude, the only means by which joint ownership entities can be structured under Islamic law are as follows:

The sharikat ‘inan can be equated to a joint stock company and the Mudaraba can be equated to a mutual fund or unit trust. This utilization of a mutual fund as a Mudaraba is generally known as complex Mudaraba as there will be several investors involved. The fact that a mutual fund is usually constituted as a variable capital limited liability company meets the Islamic criteria for a Mudaraba to give limited liability to the investor and to give the investor a vehicle from which he or she may withdraw the capital sums at will.

The prospectus of a mutual fund can act as the Mudaraba contract, which stipulates how the money is to be invested and wherein all of the various issues that could potentially be open to dispute can be clarified.

I hope that this clarifies the way in which joint business can be conducted within an Islamic framework. This area of fiqh al-muamallat is fairly complex, and there is a vigorous debate taking place among the jurists who are trying to apply the principles and concepts of this area of fiqh to the more complex patterns of the modem commercial world. However, what should be clear is that the first step in structuring a contract under Islamic law that involves forms of joint ownership is to understand the conceptual legal framework within Shari’ah under which the discussions are taking place.
Glenn StewartGlenn M. Stewart is a renowned expert on Middle Eastern affairs and business. a graduate of Oxford University, Glenn M.Stewart holds an advanced degree in Islamic History and Arabic and lived in the Middle East for 27 years. A successful entrepreneur and businessman, Stewart has a unique insight into this critical and important area of the world.

If you would like to see my other writing, please visit www.glennmstewart.com

 

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