HAIZAM FITRI BIN ABDUL JALIL
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2008268206
SITI NURAMANI BINTI ABDUL MANAB
2008261672
SITI NUR HANIM BINTI ISMAIL
2008268228
Islamic Law of Transactions (Law 737)

Research Topic:
Mudharabah and Musyarakah are among
the products introduced in Islamic Law in
order to avoid the practice of riba
(interest). Compare and contrast these two
contracts.
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Definition:
- Mudharabah : means that one party provides capital and the
other utilises it for business purposes under the agreement
that profit from the business will be shared according to a
specified proportion. (Partnership and Profit-Sharing in
Islamic Law, Muhamad Nejatullah Siddiqi, The Islamic
Foundation, London, U.K, 1985 pg15)
- Musyarakah : means participation of two or more persons in
a certain business with defined amount of capital according
to a contract for jointly carrying out a business and for
sharing profit and loss in specified proportions. (Partnership
and Profit-Sharing in Islamic Law, Muhamad Nejatullah
Siddiqi, The Islamic Foundation, London, U.K, 1985 pg15)
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Definition (cont..)
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Riba (interest): the extra money that you pay for borrowing
money from bank or the money that you earn when you
keep money in a bank. (Oxford Wordpower Dictionary, new
3rd edition)
Prohibited in Islam through Al-Quran verse (3.130) “You
who believe, devour not usury, double and multiplied; but
fear God that you may [really] prosper.’ (Article by Hussein
Hassan; Contracts in Islamic Law: The Principles of
Commutative Justice & Liberality (2002))
The Prophet p.b.u.h said: “Gold for gold, silver for silver,
wheat for wheat, barley for barley, date for date, salt for
salt, of the same quantity and quality, from hand to hand.
If there is a surplus, this is usury. If the article are of
different nature, sell as you please, but from hand to hand.”
(from same article)
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Cont..
Furthermore, Al-Quran verse 2:275; “Allah
permitted bay (sale and purchase) and prohibited
riba (interest or usury)”. [The Practices of Shariah
Principles in Instrument of Islamic Financial
System : An Overview by Fadillah Mansor)
 In applying the above verse, muslim scholar as
well as the practitioners established principles of
mudharabah and musyarakah.

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FEATURES OF MUDHARABAH
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Agreement between at least 2 parties known as lender/investor (I)
(ra’s al-mal) & entrepreneur (E)(mudarib).
I entrust money to E who will manipulate for profit in the agreed
manner. If any, I will receive principles and profit on pre agreed
proportion and remaining balance will be kept by E.
Profit will be on proportional basis not on lump sum or
guaranteed return. It revealed no unfair terms to be shouldered
by E.
Uncontrollable loss by E, I will face it consequence of financial
losses (tangible) but E only losses time, effort or may be
reputation in the eye of future investor (intangible).
I tend to act as “sleeping partner”.
Only I contribute the capital. (all from Fadillah Mansor’s
article)
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CONT…
 Ali bin Abi Talib empahsised that all losses must be paid for out
of capital.

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If the profits are divided equally as per their agreement, no losses
will be charged to the mudarib.
If the investor has stipulates the conditions that the mudarib
should not enter into any transaction involving certain conditions
and the investor did not follow the instruction then the investor is
not liable to any repayment or replacement of the capital
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FEATURES OF MUSHARAKAH
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2 broad categories:

Sharikah al-mulk i.e property partnership

Sharikah al-’aqd i.e contractual partnership
5 types of Sharikah al-’aqd:

Sharikah al-mal or finance partnership

Sharikah al-a’mal or labour partnership

Sharikah al-wujuh or credit partnership

Sharikah al-’inan or limited investment partnership

Sharikah al mufawadah or unlimited investment
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cont,.
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Joint-venture agreement involves 2 parties for specific business
activity for the sake of profit.

Timely based agreement or fulfillment of certain objective

Both parties will contribute capital and involve in the
management of that business activity. Capital can be in any form
of immovable property or cash.

Profit sharing based on specified agreed ratio.
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Consequence of any loss, parties shoulder the loss in proportion to
their share of financing.
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SHARIKAH AL-MULK
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The origin of the partnership is the joint ownership of property.
Joint ownership is its only qualification, and no joint exploitation
of property is necessary.
It occurs when two or more people are partners in the possession
of property.
The rule governing this type of sharikah is that any increase in
the property shall be shared by the co-owners in proportion with
the extent of their ownership.
Each of them is in the category of a stranger in regard to any
action on the part owned by his colleague.
It is unlawful for either partner to perform any act with respect to
the other’s share except with the latter’s express permission.
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CONT…
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In terms of liability of the partners, they are quite independent of
each other, except for actions based on express authorizationby
any of the partners.
Their partnership is only in terms of ownership and potential
sharing of any profit or increase in the co-owned property, not in
term of sharing the liabilities arising from the partners’ actions.
This type of sharikah may not be known in the common law or
Malaysian law. In fact mere joint-ownership is generally
insufficient to constitute a partnership in common and Malaysian
law
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SHARIKAH AL-’AQD
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The origin of the partnership is the contract between the parties.
The structure of this type of sharikah may have more similarities
with the normal partnership in common law and Malaysian law.
For sharikah al `aqd, joint ownership is not an element necessary
for the establishment of the partnership.
The emphasis is rather on the joint exploitation of capital and the
joint participation in profits and losses, based on the terms of the
partnership contract.
Joint ownership is one possible consequence, and not a
prerequisite for the formation of sharikah al `aqd
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CONT…
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The jurists further sub-divide Sharikah Al Aqd into various other
categories.
The subdivisions depend on a number of factors. If the underlying
factor is the subject matter of capital contribution, sharikah al
`aqd can be sub-divided into three main categories:(1)
sharikah al amwal,
(2)
sharikah al a`mal
(3)
sharikah al wujuh.
When the subject matter of the capital is money, it becomes
sharikah al amwal (monetary partnership).
If the capital is in the form of labour, it becomes sharikah al
a`mal (labour partnership).
If the capital is in the form of reputation or creditworthiness, it
becomes sharikah al wujuh (reputation partnership).
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CONT…
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The jurists also make further sub-divisions to sharikah al `aqd
based on the terms of the contract, i.e., whether the partners are
required to contribute equally to the capital and enjoy full
equality in exploiting the capital and sharing the profit or not.
Based on this consideration, sharikah can be divided into two
types, sharikah al mufawadah and sharikah al ‘inan.
Sharikah al mufawadah means an unlimited investment
partnership, whereby each partner must contribute equally to the
capital, and enjoys full and equal authority to transact with the
partnership capital or property.
The Hanafis consider each partner as an agent (wakil) for the
partnership business and stands as surety (kafil) for the other
partners. Thus, the partners can be made jointly and severally
responsible for the liabilities of their partnership business
provided that such liabilities have been incurred in the ordinary
course of business.
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CONT…
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This type of sharikah clearly implies unlimited liability on the
part of partners since they are both agents and guarantors of each
other.
Sharikah al’inan can be defined as a limited investment
partnership.
Whereby each partner may only transact with the partnership
capital according to the terms of the partnership agreement and
to the extent of the joint capital. Hence, their liability towards
third parties is several but not joint.
The liability of partners in Sharikah Al`inan resembles that of
modern-day limited liability partnerships.
Both Sharikah Al-Mufawadah and Sharikah Al`inan can occur in
all the three earlier types of sharikah, i.e., Sharikah Al Amwal
(monetory partnership), Sharikah Al A`mal (labour partnership)
and Sharikah Al Wujuh (reputation partnership).
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CONT…
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Sharikah Al Mufawadah is rarely opted for due to the higher
degree of responsibility and the practical difficulty to achieve full
equality between the partners in all aspects of the partnership
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COMPARE AND CONTRAST
MUDHARABAH
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Definition
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Profit sharing.

Sunnah
It was narrated by Ibn Majah
that the Prophet was reported
to have said:

“Three things done which have
a blessing in it, namely, credit
sale, Mudharabah, and a
mixture of flour and barley for
the purpose of invitation, and
not for the purpose of sale”
MUSYARAKAH
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Definition
Partnership. Literally it
means a joint venture
agreements between 2 parties
to engage in a specific
business activity with an aim
making profit.
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
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Mudharabah
capital
represents savings for the
owner or investor but is
generally a source of livehood
for the working partner or
entrepreneur.
Method

It the basis of reorganizing
banking activity in an
interest free framework. This
can be done by entering into 2
tier Mudharabah Agreement.

Method
The Islamic investment
company and the client agree
to participate in a joint
venture to be completed
within an agreed period of
time.
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
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First Tier
Between the bank and the
depositor who agrees to put
money in the bank’s
investment account and to
share profit with it.

Both parties contribute to the
capital of the operation in
varying degrees and agree to
divide the net profit in
proportion to the amounts
invested by each.
In this case, the Depositors
are the providers of the
capital and the Bank
functions as the Manager of
funds.
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Second Tier
Between the bank and the
entrepreneurs who seek
finance from the Bank on the
conditions that profit
accruing from their business
will be shared between them
and the bank in previously
agreed proportion, but the
lost shall be borne by the
financier only.
In this case, the Bank
functions as provider of
capital and the Entrepreneur
work as the Manager.
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
In case there is more than one
financier of the same project
i.e one project is jointly
financed by several Banks,
profits are to be shared in
mutually agreed proportion
previously determined but
lost is to be shared in the
proportion in which the
different financier’s have
invested the capital.
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Principle
As a basis of financial
intermediation in the Islamic
economy is offered as a viable
basis for an interest free
banking system.
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Principle
Both parties will provide
capital and the investor or
lender may also participate in
the management.
The creditor does not earn
interest on the fixed rate in
this system but participate in
the business risks and earn
the share of the profit.
Thus, under an Islamic
Banking system, the cost of
capital is not zero, i.e,
analogous to a zero interest
rate, as some people assume
it to be.
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The only difference between
Islamic banking and the
interest banking in this
respect is that the cost of
capital in interest based
banking is expressed in terms
of a predetermined fixed rate,
while in Islamic Banking, it is
expressed in absolute amount
which may also be expressed
as a ratio of profit.
The distribution of profit
between two parties must
necessarily be on a
proportional basis and cannot
be a lump sum or a
guaranteed amount.
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
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In the case of loss as a result
of circumstances beyond the
control of the entrepreneur,
the investor will bear all the
financial risk and the
entrepreneur losses the time
and his effort s only.
Profit distribution
Profit distribution
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No profit can be recognized or
claimed unless the capital of
the Mudharabah is
maintained intact.

Profit will be shared by two
parties in the agreed ratio
and the ratio not coincide
with the ratio of participation
in the financing activity.
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Whenever the Mudharabah
incurred losses, such losses
stand to be compensated by
the profits of future operation
incurs losses, such losses
stand to be compensated by
the profits of future
operations of the
Mudharabah.
The losses brought forward
should be set again the future
profits.
All in all, the distribution of
profit depends on the final
result of the operations at the
time of liquidation of the
Mudharabah contract.
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If losses are greater than the
profits at the time of
liquidation, the balance (net
loss) must be deducted from
the capital.
If the total Mudharabah
expenses are equal to the
total Mudharabah revenues,
the capital provider will
receive his capital back
without either profit or loss,
and there will be no profit in
which the entrepreneur is
entitled to share. If profit
realized, it must be
distributed between parties
as per Agreement.
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Liability
Entrepreneur shall not be
liable for any loss of the
venture.
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Liability
In the event of loss, all parties
bear the loss in proportion to
the share of financing
Thus, if the Mudharabah
business runs into a loss, only
the investor will have to bear
the loss.
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
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Period
Continues as such for as long
as the entrepreneur does not
contribute his own funds to
the business.
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Period
Each partner is entitled to
terminate the partnership after
giving his partner(s) due notice to
the effect, in which the case he
shall be entitled to his share in
the partnership, and the
withdrawal would not necessitate
the termination of the
partnership of the remaining
partners.
It come to an end at the expiry
date or before the expiry date if
the partners agree to terminate it
prematurely, or, in the case of
partnership in a particular
business, by actual liquidation of
the assets that constitute the
subject matter.
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CONCLUSION
Although equity financing was not dealt with th Quran, the Sunnah
affirmed that Uqud al Ishtirak (profit sharing contracts of Al Mudharabah
and Al- Musharakah practised by pre-Islamic Arab society are allowed in
Islam.
As stated earlier, this would extend to the profit sharing contracts practised
by Pre-Islamic Arab society. On this basis, equity financing was allowed in
islam as well.
Surah An-Nisa(4), verse 32 :
“ Do not convert the bounties which God has bestowed more abundantly on
some of you than on others. Men are allowed what they earn, and women
are alloted what they earn. Ask God for something of His bounty….
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The above verse reiterates the principle that no one may claim more than
he has earned.
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