The basics of the concept of musharakah.

Musharakah is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an ideal alternative for the interest based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, Musharakah can play a vital role in an economy based on Islamic priniciples.

Interest predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while Musharakah does not envisage a fixed rate of return. Rather, the return in Musharakah is based on the actual profit earned by the joint venture. The financier in the interest based loan cannot suffer loss while the financier in Musharakah can suffer loss, if the joint venture fails to produce fruits.

Musharakah is the term frequently referred to in the context of Islamic modes of financing. The connotation of this term is rather limited than the term shirkah more commonly used in the Islamic jurisprudence. For the purpose of clarity in the basic concepts, it will be the pertinent at the outset to explain the meaning of each term, as distinguished from the other.

Shirkah means sharing and in the terminology of Islamic Fiqh, it has been divided into two kinds:

1. Shirkat ul Milk: It means joint ownership of two or more persons in a particular property. This kind if Shirkah may come into existence in two different ways: Sometimes it comes into operation at the option of the parties. For example, if two or more persons purchase an equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called shirkat ul milk. Here this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly.But there are cases where this kind of Shirkat comes to operate automatically without any action taken by parties. For example, after the death of a person all his heirs inherit his property which comes into their joint ownership as an automatic consequence of the death of that person.
2. Shirkat ul Aqd: This is the second type of Shirkat which means a partnership effected by mutual contract. For the purpose of brevity it may also be translated as joint commercial enterprise. It is further divided into three kinds:I) Shirkatul amal: where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio. For example, if two persons agree to undertake tailoring services for their customers on the condition that the wages earned will go to a joint pool which shall be distributed between them irrespective of the size of the work each partner has actually done, this partnership will be a shirkat ul amal.
   ii) Shirkat ul amwal: where all the partners invest some capital into a commercial enterprise.
   Iii) Shirkatul wujooh: Here the partners have no investment at all. All they do is that they purchase the commodities on a deferred price and sell them at spot. The profit so earned is distributed between them at an agreed ratio.

By Ramsha Amir