Financial Instruments 87
management skills or goodwill, and so on. For the sake of our discussion, we
will refer to a musharakah as a partnership based on capital contribution.
Features and Conditions
■ (^) The partnership agreement need not necessarily be formal and written;
it can be informal and oral.
■ (^) Every partner is an agent of and for the other, as all the partners benefi t
from the musharakah business.
■ (^) Every partner enjoys equal rights in all respects, in the absence of any
condition to the contrary.
■ (^) Every partner has a right to participate actively in the affairs of
musharakah if they so wish. However, in case of formal legal enti-
ties such as limited companies and cooperative societies, partners
delegate their rights to participate in the management to profes-
sional managers.
■ (^) The ratio of each partner’s share in the profi ts is predetermined as a
proportion or percentage; no fi xed amount can be predetermined.
■ (^) There is unanimity among Shari’ah scholars that any loss is to be borne
by the partners according to their capital contribution. The Shari’ah is
very clear that if a party has not invested any capital in the partnership,
they are not liable for the loss. This implies that any capital investment
is subject to the risk of loss of capital, but any investment of labor or
time is limited to the loss of the time invested and the loss of capital is
not required to be shared by such a partner.
■ (^) The Shari’ah recognizes the limited liability of shareholders in a
musharakah - based legal entity, such as a joint stock company or a cor-
poration. Shareholders cannot be held liable for more than their share
of capital invested.
■ (^) Whereas a partner can withdraw from a partnership after discharging
their liabilities as agreed by the partners, a shareholder in a company
cannot withdraw from the partnership. They can exit the partnership
by selling their share in the market.
■ (^) A loss incurred during one period can be carried forward and offset
against the profi ts of the next period, if any. However, until the total
loss has been written off, any distribution of “profi t” will be considered
as an advance to the partners. In order to avoid such a situation, the
practice of building reserves from profi ts against future losses is recom-
mended.
In modern times, Islamic banks have developed what is known as a
“consecutive partnership,” which considers depositors during a full fi nan-
cial year as partners in the proceeds of that fi nancial year, regardless of
the full usage of their funds during this period. Similarly, adjustments are
made in the profi ts for proceeds accrued, but not realized, during a fi nancial
period. This was necessary to overcome the accounting problems with the
determination of the profi t and loss of each depositor based on the deposit