Musharakah

[Sapphire Capital]

Shirkah, or sharing, can exist as shirkah al-milk, a sharing of ownership in a property, or as shirkah al-aqd, a sharing by contract in a given endeavour. Here, all partners to a business endeavour contribute funds and have the right but not the obligation to exercise executive powers in that project. Musharakah is a modern term that is synonymous with this form of shirkah. Musharakah displays some of the features of modern partnership structures and the holding of voting stock in a limited company. Generally agreed terms are that:
a) all partners must contribute capital to the partnership.
b) as for mudarabah part b)
c) contributions must be subject to profit sharing in any ratio agreed between the partners. Therefore, as with mudarabah, a fixed amount of payment must not be agreed at the outset as the benefit to the investor in respect of his or her investment. The Shafi and Maliki schools recommend a profit share proportional to financing share. Imam Hanifa argues that where a partner chooses to exist as a sleeping partner, having no executive involvement in the business, that partner cannot claim a share of profits above the ratio of his contribution of capital. Other jurists argue that no restrictions be placed upon the ratio of profit share that may be agreed among partners.
d) the partners' losses are to be shared according to the financing share of each partner and may not be limited to the value of their capital contributions.
e) the partnership may be agreed for a set period of time or be indefinite. It can be established as permanent musharakah in which invested funds are not subject to repayment in the short term, or as diminishing musharakah where invested funds are repaid over time as profitability allows. Such divestment terms are agreed at the outset.
f) it may be agreed that the termination of the musharakah can only occur with the mutual agreement of all partners, though some jurists argue that one partner on his own may require the dissolution of the musharakah. Such a possibility seems to hold out rather dangerous implications for those partners wishing to continue with a business endeavour, especially in the early stages of the partnership and has therefore been rejected by many jurists as an unsound basis for partnership.
g) partners must receive regular accounting and other information on business activity.
h) permission from existing partners is required before raising capital from new partners.
i) partners may negotiate fixed wages or salaries at the outset of the musharakah.

for further reading:
islamicfinancepro.files.wordpress.com/2007/08/a-rating-perspective-of-sukuk-musharakah-transactions.pdf
www.darululoomkhi.edu.pk/fiqh/islamicfinance/musharakah.html
cief.wordpress.com/2006/03/12/musharakah/