The purpose of this brochure is to outline the general Sharia'a rules and basis for Sharikat Al Aqd (known now as Musharaka) and to state the rules for each of Sharika Al Inan, Name Partnership, Service Partnership, Diminishing Musharaka and modern companies in terms of definition, Sharia'a rules applicable to them and the Sharia'a principles that must be complied with by the Islamic financial institutions.
Sharikat Al Inan
Sharikat Al Inan is a partnership between two parties or more whereby each partner contributes a specific amount of money in a manner that gives each one of them a right to deal in the assets of the partnership, on condition that the profit is distributed between them according to the partnership agreement and that losses are borne in accordance with the contribution of each partner to the capital.
Conclusion of a Sharika Contract
A Sharika contract can be concluded by agreement between the parties concerned on the basis of offer and acceptance. The contract of partnership should be documented in writing and, if necessary, registered officially. The objectives of the partnership must be clearly stated in the contract (memorandum of association) or in the articles of association of the company.
It is permitted for the Bank to enter into a partnership contract with non-Muslims
or conventional banks to carry out operations acceptable by Sharia'a unless it has become evident that the funds - cash or in kind - presented by them are from non-permissible sources. In operating a partnership with non-Muslim or conventional banks, arrangements must be made to obtain all the necessary assurances and guarantees that rules and principles of Sharia'a are observed during operations of the partnership, and that such operations are managed by the Bank or by another entity that observes the Sharia'a principles.
Sharia'a Basis of the Rules
It is permitted to conclude a partnership contract with non-Muslims or
conventional banks for carrying out permissible operations, provided that necessary guarantees are taken to ensure the observance of the Sharia'a rules and principles. The Sharia'a basis for this is the Hadith that the messenger of Allah has prohibited concluding partnership with Jews and Christians unless the selling and buying is in the hands of the Muslim (Mussanaf Ibn Shaybah 6/9). The cause of the prohibition - the fear of being involved in interest-based transactions or in concluding impermissible contracts - is absent when there are guarantees to observe and apply the Sharia'a rulings (See Al Mughni 7/110-111). The Al-Baraka seminar issued a resolution in support of partnership between Islamic banks and conventional banks (Resolution No. 9/1, Fatawa Nadawat Al-Baraka (the Ninth).
It is permitted for the Bank to include conventional banks as partners in a
syndicated financing which operates on the basis of Sharia'a provided that the Bank manages the partnership's operations and that such operations are subject to Sharia'a supervision.
Sharia'a Basis of the Rules
Same as before.
It is permitted for the partners to amend at any point of time the terms of the
partnership contract. They may make changes to the ratio of profit-sharing, provided that any losses are shared according to the share of each partner in the partnership’s capital.
Sharia'a Basis of the Rules
The basis for the permissibility of an agreement on amending the terms of
partnership and the profit sharing ratio is that this action does not lead to a possibility of precluding a partner from getting a share of the profit (see Resolution No. 11/8, Fatawa Nadawat Al-Baraka (the Eleventh) p.194).
Capital of Sharika
In principle, the capital of Sharika should be contributed in the form of monetary
assets in order to be able to determine the amount of the capital and to recognize the result of the partnership whether in profit or loss. Nevertheless, it is permissible, with the agreement of all partners, to provide tangible assets (commodities) as the capital of Sharika after the monetary values of such assets are determined and expressed in the used currency in order to calculate the share contributed by the partner.
Sharia'a Basis of the Rules
The basis for the permissibility that Sharika capital may be contributed in the
form of tangible assets other than cash, after valuation: the purpose of Sharika is to give partners a right to use the contributed money freely and to share the profit. This objective is realizable even if the capital is contributed in the form of tangible assets just as it is in the case of contribution in cash. Therefore, it is just as valid to provide tangible assets for Sharika investment as to provide cash. Upon liquidation, each one of the partners will be entitled to the equivalent value of the assets presented at the conclusion of the Sharika contract (Al Mughni 7/124). This is the view of the Maliki and the Hanbali scholars (Al Dassuqi 2/517 and Al Maghni 5/17)
In case partners have contributed their partnership capital in different currencies, such currencies must be translated into the currency of the Sharika at current exchange rates so as to determine the shares and liabilities of each partner.
Sharia'a Basis of the Rules
The requirement that a payment of contribution to Sharika capital in currency different from the designated currency of the partnership must be valued according to the current exchange rate at the time of payment: This action is a currency exchange between two currencies which is permitted provided it is carried out at the current exchange rate. This is evidenced by the Hadith narrated by Ibn Omar about selling camels at Al Baqui.
The shares of each partner in the capital should be determined, whether it is
contributed in the form of one lump sum or in more than one payment over a period of time, (e.g. when there is a need for additional funds to increase the capital).
Sharia'a Basis of the Rules
The requirement that investment of the parties in the capital should be properly
determined: is that failure to do so will lead to ambiguity in respect of the capital, "It is not permissible that the capital of a Sharika be ambiguous since certainty as to the amount of the capital is a benchmark for sharing profit. The equitable distribution of profit is not possible if the amount of capital contributed by each party is ambiguous (Al Mughni 7/125).
It not permitted that debts (receivables) alone be used as a contribution to a Sharika capital, except where debts may form part of the contribution to the capital where they become inseparable from the assets that can be presented as a contribution to the capital in the Sharika, such as when a manufacturingfirm uses its net assets as a contribution to the capital.
Sharia'a Basis of the Rules
The basis for rejecting payment of partnership capital in receivables alone is that debts owed to a partner by another partner cannot actually be used in a partnership operation, as they are not assets in possession. Again, this may potentially lead to dealing in interest (riba) if the partner is the one in debt (Al Dossouqi 3/517 and Al Mughni 5/17). However, if the receivables are combined with other assets and the ratio of the debt to the total asset is negligible, then the debt in the other assets can be presented as a contribution to partnership capital. The basis for this is the principle of tabaiyya (things dependent on another thing) as per the legal maxim "a thing which follows from another thing follows it also in law, and a separate judgment cannot be given for a thing that follows from another" and the legal maxim "the law is flexible in things that follow from another".
The funds deposited on current accounts although they are juristically classified as loans to the institutions, can be presented as a contribution to the capital in a Sharika either with the Bank itself or with a third party.
Sharia'a Basis of the Rules
The basis for allowing current account deposits as capital in partnership is that, in spite of their being considered as loans, they are presumed to be possessed by the account holders, because the funds are available on demand, and the institutions are obliged by their regulations and directives of the supervisory boards to pay the owner on demand or honour cheques paid against such accounts irrespective of the financial position of the institution.
Managing a Sharika Venture
In principle, each partner is entitled to act in the interest of the partnership in the following transactions: spot or deferred sales, taking possession or custody of the partnership receivables, making payments or deposits and providing or receiving a pledge, asking for payment of debts, admission of liabilities, taking legal action, cancellation of contracts, rejecting defective goods, leasing assets, processing transfers of rights and debts, requesting credit facilities, and doing whatever is customary in the interest of trading. A partner is not entitled to act against the interest of the partnership or to perform actions that will damage the partnership, such as giving out grants or loans, except with the consent of all the partners. However, a partner may give out short–term small loans that will not, according to customary practice, affect the operation of the partnership.
Sharia'a Basis of the Rules
The basis for the right of each partner to participate in the management of the partnership is that partnership is based on elements of agency and trust. The element of agency requires that each party be entitled to be involved in the operations in a manner that is in the interest of the partnership. The element of trust requires that each party acts for the benefit of the partnership. (see Al Mughni 7/128)
It is permissible for the partners to agree that the management of the partnership will be restricted to certain partners or to a single partner. In this case, the other partners are bound to abide by their consent not to act on behalf of the partnership.
It is permissible for the partners to appoint a manager other than one of the partners and pay him a fixed remuneration that will be included in the expenses of the Sharika. It is also permissible that the partners set side a portion of the investment profit plus a fixed remuneration as a form of incentive for the manager. However, if the management is carried out from the outset for a percentage share in the profit earned, this action classifies the manager as a mudarib and he is only entitled to a share in the profit, if any, and deserves no more than the remuneration for management services.
It is not permissible, in a Sharika contract, to specify a fixed remuneration for a partner who contributes in managing the Sharika funds of provides some form of other services, such as accounting. However, it is permissible to give him a greater share of a profit than he would receive solely on the basis of his share in the partnership capital.
Sharia'a Basis of the Rules
The basis for not allowing a fixed remuneration for a partner who assists in the management is that this may lead to guaranteeing the capital of the partner, or to his not being exposed to risk of loss, if any, in proportion to his contribution to the capital.
It is permissible that one of the partners be appointed to provide services provided that the appointment is based on an independent contract from the Sharika contract so that he may be dismissed as a manager at any point of time without the need to amend or to terminate the Sharika contract. In this case, the appointed partner may earn a specific remuneration.
Sharia'a Basis of the Rules
The basis for the permissibility of appointing, by a separate independent contract, a partner to manage the partnership and the permissibility of paying him wages is that the partner becomes an employee of the company and he is not acting in his capacity as a partner.
Guarantees in a Sharika Contract
All partners in a Sharika contract maintain the assets of the Sharika on a trust basis. Therefore, no one is liable except in cases of misconduct or negligence. It is not permitted to stipulate that a partner in a Sharika contract guarantees the capital of another partner.
Sharia'a Basis of the Rules
The basis of the requirement that a partner is not liable except in cases of misconduct or negligence, and of the invalidity of a stipulation to the effect that a partner guarantees the capital of another partner, is that partnerships operate on the basis of trust, and to hold a trustee liable for losses is not permissible (see Ibn Qudamah, Al Kafi 2/230 and Al Mobdi 4/256).
It is permissible for a partner in a Sharika contract to stipulate that another partner provides a personal guarantee or a pledge to cover cases of misconduct, negligence or breach of contract.
Sharia'a Basis of the Rules
The basis for the allowing a party to a partnership to require a guarantee or a pledge from the other party as a security against cases of misconduct and the like is that this requirement does not conflict with the rules for partnership. The general rule in contracts and partnerships is that parties are required to observe stipulated terms as far as possible (see Fatwa (1/5) of Al Baraka First Seminar1403 Hijra, Resolutions and Fatwas of Al Baraka Seminars page 18)
A third party may provide a guarantee to make up for a loss of capital of some or all partners. This guarantee is circumscribed with the conditions that the legal capacity and financial liability of such third party as a guarantor are independent from the Sharika contract, the guarantee should neither be provided for monetary consideration nor linked in any manner to the Sharika contract; the third party guarantor should not own more than one half of the capital in the entity to be guaranteed, and the guaranteed entity should not own more than one half of the capital in an entity undertaking to provide a guarantee. The party benefiting from such undertaking is not, however, entitled either to claim that the Sharika contract becomes null and void or refuse to meet its obligations under the contract if the guarantor fails to meet his voluntary promise to cover the loss of this capital, on the grounds that such third party undertaking was a considered factor in the partnership contract.
Sharia'a Basis of the Rules
The basis for the permissibility of a "promise to guarantee" by a third party whose financial liability is independent from the parties to a partnership is that this action is a mere voluntary act and an undertaking that is independent of the partnership contract. In other words, a fulfillment of a promise by a third party is not a condition for the validity of the contract. Further, the third party's guarantee does not adversely affect the established Sharia'a principle that rules against guaranteeing capital or profit. A resolution was issued by International Fiqh Academy in support of the permissibility of a third party's promise to guarantee (International Fiqh Academy Resolution No. 30(5/4)).
The basis for the requirement that the guaranteeing Bank should not be the owner of the guaranteed institution or vice versa is that by ownership the transaction becomes in essence a guarantee by a partner of the capital of anther partner.
Results of Sharika Investments (Profit and loss)
The Sharika contract should incorporate a provision specifying the manner of sharing profits between the parties. The allocation of profits must be made in a manner that gives each partner an undivided percentage of profit, not a sum of money or a percentage of the capital.
Sharia'a Basis of the Rules
The basis for non-permissibility of an agreement to determine the profit share on the basis of a lump sum or a percentage of the capital is because this is inconsistent with the sharing of profit and because profit is not realized unless the capital is recovered in full.
It is not permitted to defer the determination of the profit percentages due to each partner until the realization of profit. The profit percentage for each partner must be determined at the conclusion of a Sharika contract. The parties may bilaterally agree to amend the percentages of profit-sharing on the date of distribution. Also, a party may relinquish part of the profit that is due to it in favour of another party.
Sharia'a Basis of the Rules
The basis for the impermissibility of deferring the statement of the profit ratio of each a party until profit is realized is because such a procedure involves uncertainty which may potentially lead to dispute. However, the parties may amend the profit ratio or to relinquish a right to profit on the date of distribution, because the profit belongs to them and hence it is permissible for them to make amendments or relinquishments.
In principle, the shares of profit must be proportionate to the percentage of each partner̕ s contribution to the Sharika capital. Nevertheless, the partners may agree to a profit-sharing arrangement that is not proportionate to their contributions to capital, provided that the additional percentage of profit over the percentage of contribution to the capital is not in favour of a sleeping partner. If a partner does not stipulate a condition that he be a sleeping partner, then he is entitled to stipulate an additional profit share over his percentage of contribution to the capital even if he did not play an active part.
Sharia'a Basis of the Rules
The basis for the requirement that the profit share may be either proportionate or disproportionate to the contribution of each party in the capital is that an individual is entitled to a share in profit on the basis of the funds contributed, the work done or the risk borne. If an individual is involved in any of these three matters, then it is possible for the parties to agree upon a profit ratio accordingly. This is the opinion of the Hanafi and Hanbali schools (see Al Merghinani, Al Hidaya Sharh Al Bidayah 3/7 and 8, published by the Islamic Library, and Al Kasani, Bada'i Al Sana'i 6/62 and 63, and Ibn Muflih, Al Mobdi 5/4 published by the Islamic Bureau, Beirut 1400 Hijra)
It is a requirement that the losses be incurred by the partners pro rata their contributions to the Sharika's capital. It is not permitted, therefore, to agree on holding one partner or a group of partners liable for the entire loss or for a percentage of loss that does not match their share of ownership in the partnership. It is, however, valid that one partner assumes, without any prior condition, the responsibility of bearing the loss at the time of the loss.
Sharia'a Basis of the Rules
The basis for the impermissibility of one party incurring all the losses or the distribution of the losses in an disproportionate manner is the saying of Ali Ibn Abi Talib may Allah bless him "profit distribution is according to agreement of the partners and loss must be borne in proportion to the contribution to the capital" (Reported by Ibn Abi Shaibah, Al Mussanaf 4/268, published by Al Rushd Bookshop, Riyadh). Therefore, it is a void condition that one party should bear the loss of other parties and such a condition facilitates misappropriation of the property of others.
It is permissible for the partners to agree on the adoption of any method of allocation of profit, either permanent or variable, for example, by agreeing that the permanent of profit shares in the first period are one set of percentages, depending on the disparity of the two periods or the magnitude of the realized profit. This is allowed provided that using such a method does not lead to the likelihood of a partner being precluded from participation in profit.
Sharia'a Basis of the Rules
The basis for the permissibility of the partners agreeing on any method for allocation of profit, whether fixed or variable during a particular period, is that this agreement is circumscribed with a condition that the method adopted should not contravene any Sharia'a principle, which means that the method should not preclude a party from sharing in profit.
It is not permitted to start the allocation of profit between the partners unless the operating costs, expenses and taxes are deducted in calculating the profit and capital of the Sharika is maintained intact.
Sharia'a Basis of the Rules
The basis for not allowing final distribution of profit before deduction of expenses is that there is no profit unless the capital is maintained intact.
It is not permitted that the conditions or modes of profit allocation in a Sharika contract include any clause or condition that may result in the probable violation of the principle of sharing profit. Any condition, term or mode of profit allocation with such an effect would render a partnership contract void.
Sharia'a Basis of the Rules
The basis for the impermissibility of specifying a lump sum profit amount for a partner is that this action is inconsistent with sharing in profit.
It is not permitted for the partners to stipulate that one of the partners will receive as a profit share a lump sum from the profit or a percentage of the capital of Sharika.
Sharia'a Basis of the Rules
The basis for not allowing a partner to earn a share of profit and a fee simultaneously is that this fee is a lump sum that may preclude sharing in profit due to the possibility that the partnership business may not realize enough profit to cover it. The basis for allowing a partner to receive, based on a separate contract, a fee is that the contract that entitles a partner to a fee is not part of the partnership contract and because this fee is not inconsistent with sharing in profit, as the partner in this case is considered to be a third party.
It is permissible to agree that if the profit realized is above a certain ceiling, the profit in excess of such a ceiling belongs to a particular partner. The parties may also agree that if the profit is not over the ceiling or is below the ceiling, the distribution will be in accordance with their agreement.
Sharia'a Basis of the Rules
The basis for the permissibility of an agreement that if the profit realized is above a certain ceiling, the profit over such ceiling belongs to a particular partner, is because this constitutes a valid condition that is not inconsistent with profit sharing (Al Bahr Al Zahar 5/83 published by Dar Al Kitab Al Islami). Further, the capital provider is the one who will incur losses, if any.
The profit may be finally distributed on the basis of the proceeds of selling all the existing assets, known as actual valuation or on the basis of constructive valuation of assets which means valuation of the assets of the Sharika at a fair value. The receivables must be value that is expected to be realized, i.e. after deduction of an allowance for doubtful debts. In valuing receivables, it is not permitted to take account of the time value of money (interest) or the notion of discount on the basis of current value, i.e. a discount of the amount of the debt as consideration for earlier payment.
Sharia'a Basis of the Rules
The basis for the permissibility of distributing profit based on constructive valuation is that the use of this method is permitted by Sharia'a (see Resolution No. 4 of the 16th Session of the Muslim World League held in Mecca on 21-26/10/1422 Hijra, and the resolution No. 30(5/4) of the International Fiqh Academy, and Fatwa No. 8/2 of Al Baraka 8th Forum, page134) and was used in a number of cases, such as Zakah and theft. The basis for the validity of constructive valuation is also the saying of the prophet (pbuh) if a co-owner of a slave frees his part, the slave will be set free against his property if he has property otherwise it will be valued by fair value and freed. (Narrated by Muslim, Sahih Muslim 2/1140).
It is not permitted the final allocation of profit take place based on expected profit, i.e. it is necessary that the allocation of profit takes place on the basis of actual profit earned through actual or constructive valuation of the sold assets.
It is permissible to allocate some funds to any of the partners on account, i.e. before actual or constructive valuation, on condition that the final actual settlement will take place at a later stage. In this case, the parties should undertake to reimburse to the Sharika any amount that they have received in excess of their share of profit after actual or constructive valuation.
Sharia'a Basis of the Rules
The basis for the permissibility of distributing funds to partners on account, i.e. subject to settlement and refund of any additional profit acquired over the contribution to the capital on the date of actual liquidation, is because this action causes no harm to any of the partners since the distributed funds on account are subject to settlement at a later stage.
If the subject-matter of Sharika is assets acquired for leasing that bring in income or the subject-matter is services that bring in revenue, then the amount distributed to the partners annually is on account, and it is subject to settlement and reimbursement at the end of the Sharika.
It is permissible, based on the articles of association or a resolution of the partners, not to distribute the profit of the Company. It is also permissible to set aside periodically a certain percentage of profit as a solvency reserve or as a reserve for meeting losses of capital (investment risk reserve) or as a profit equalization reserve.
It is permissible to agree on setting aside a proportion of profit non-partners as a charitable donation.
Termination of Sharika
Each partner is entitled to terminate the Sharika (i.e. to withdraw from the partnership) after giving the remaining partners due notice to this effect, in which case he shall be entitled to receive his share in the partnership, and this withdrawal would not necessitate the termination of the partnership of the remaining partners. It is permissible for the remaining partners to enter into a binding promise for the continuity of the partnership for a period of time. In such case, it is permissible for the parties to agree to terminate the partnership before such a fixed period. In all cases, the obligations and actions that took place before termination will remain unaffected and they will continue to exit. This rule applies to non-joint-stock companies as well.
Sharia'a Basis of the Rules
The basis for the rule that termination of partnership will not affect obligations and actions that took place before it is to protect the remaining partners against any potential damage.
It is permissible for a partner to issue a binding promise to buy, either within the period of operation or at the time of liquidation, the assets of the Sharika as per their market value or as per agreement on the date of buying. It is not permissible, however, to promise to buy the assets of the Sharika on the basis of their face value.
Sharia'a Basis of the Rules
The basis for the impermissibility of a promise by one of the partners to buy assets of the partnership at face value is that this constitutes a guarantee of the capital which is prohibited by Sharia'a. The basis for the permissibility of a promise to buy the assets of a partnership at the market value is that this does not constitute a guarantee of capital.
A Sharika venture comes to an end on 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 transaction, by actual liquidation of the assets that constitute the subject-matter of the partnership. The termination of a Sharika can also take place on the basis of virtual liquidation. In this case, the Sharika will be regarded as if it has been ended and the parties have commenced a new partnership whereby the assets that were not sold through actual liquidation, but have been valued on the basis of virtual liquidation, will be considered as the capital of the new partnership. If the reason for liquidation is the expiry of the partnership duration, then all remaining assets shall be sold according to current market values and the proceeds will be used as follows:
1. Payment of liquidation expenses.
2. Payment of financial liabilities from the total assets of the partnership.
3. Distribution of the remaining assets among the partners in accordance with
their percentage of contribution to the capital. If the assets fall short of
recovering all the capital, then they shall be distributed on a pro rata basis.
Name Partnership (Partnership of liability)
A name partnership (partnership of liability) is an agreement between two or more parties to conclude a partnership to buy assets on credit whereby each of them guarantees the payment of part of the price according to percentages agreed upon by the parties. The percentages of profit sharing may be determined in accordance with or without the parties share in guaranteeing payment.
The partnership of liability has no cash capital, because the subject- matter of the partnership is an obligation or a liability that is contingent on creditworthiness (good reputation), namely, the guarantee of the partners to pay the amount of the liability of the partners. Therefore, the parties should agree on the ratio of liability for which each partner is responsible when paying such debts.
The profit shall be distributed according to the agreement. However, the loss
will be borne by each partner according to the share that each partner had undertaken to bear in proportion to the overall assets that are purchased on credit. It is not permitted that the contract of partnership incorporates a provision that specifies the deduction of a fixed amount from the profit for a particular partner.
Service partnerships (professional or handicraft partnerships and partnerships in skilled trades)
A service partnership is an agreement between two or more parties to provide services pertaining to a particular profession, craft or skilled trade or to render some services or professional advice or to manufacture goods with a view to sharing profit according to an agreed percentage.
The service partnership has no cash capital, because the subject- matter of the partnership is the provision of services. There is no Sharia'a restriction regarding any disproportion in the provision of the services by the partners or their representatives. The partners may also divide different types of services among themselves and assign a set of services or a particular service to certain or all partners in a way that will ensure the best use of skills and resources to achieve the purpose of the overall service to be rendered.
The profit shall be distributed among the partners according to an agreed percentage, but the contract should not specify that a fixed sum be paid from the profit to a particular partner.
If a service partnership requires capital or fixed assets (e.g. equipment or tools), then it is permissible for each party to provide the necessary goods that his services require, and in such a case the goods provided will be the property of the partner who provided them. The partners may contribute funds to acquire such goods on the basis of joint ownership. It is also permissible for a partner in a Sharika to provide capital goods required by the partnership in consideration of a fee that will be charged against the Sharika operation as expenses.
The legitimacy of modern companies is evidenced by the principle of Sharia'a that the general rule for business transactions is that such transactions are permissible as long as they do not involve clearly prohibited elements, especially in view of the fact that the categorization of most of these companies had a parallel in Sharia'a – approved contracts, such as the Inan partnerships, Mudarabas and the like (see Companies – Dr. Abdul Aziz Al Khayyat 2/158-159).
Joint Stock Companies
A joint stock company is a company in which the capital is divided into a number of equal negotiable units, and each shareholder's liability is limited to his share in the capital. It is a form of financing partnership, to which the rules of Sharika Al lnan apply with the exception of the issue of the limited liability of the shareholders and the inability of a shareholder to terminate the company.
A joint stock company has a juristic personality through its incorporation by law in such a way that it cannot avoid its obligations to people dealing with it. This separates the liability of the company from that of its shareholders (equity holders) and also gives it a separate legal status, distinct from the legal capacity of the shareholders. A joint stock company has the right to take legal actions through its representative and it is subject to the jurisdiction of the place of its incorporation.
Shari'a a Rulings on Joint Stock Companies
The contract forming a joint stock company is binding for the whole duration fixed by the Articles of Association, which stipulate that the company cannot be dissolved except with approval of the majority of the shareholders. Therefore, no shareholder is entitled to dissolve the company in respect of his shares. However, a shareholder may sell or assign his shares in favour of another person.
It is permissible to add a certain percentage to the actual value of the shares on the subscription date in order to recover issue expenses, provided that such percentage is calculated to appropriately reflect the amount of such expenses.
It is permissible to issue new shares to increase the capital provided the new shares are issued at a fair value of the existing shares, as determined by a proper valuation of the company̕ s assets by experts. In other words, the new issues can be issued at a premium or a discount of their nominal value, or at the current market value.
It is permissible that a shareholder underwrites an issue of shares if such an underwriting is without any consideration. In such a case, there should be an agreement between the concerned person and the company on the date of incorporation of the company to the effect that such a person would buy all or part of the shares issued. In other words, this would be an undertaking to subscribe to all the remaining shares that are not subscribed at their nominal value. It is permissible for a shareholder to ask for consideration for services provided, other than the actual underwriting, such as conducting feasibility studies or marketing the shares,
Sharia'a Basis of the Rules
The basis for the permissibility of underwriting issues of shares without taking consideration is that this is an undertaking that does not involve an impermissible act, such as taking a commission for a guarantee. The International Islamic Fiqh Academy has issued a resolution in this respect (Resolution No. 63(1/7)).
It is permissible that the amount of the subscription to the shares be made in two instalments by paying one installment immediately and deferring the payment of the other installment. In such case, the shareholder would be deemed to have subscribed to what has actually been paid while the unpaid amount will be an undertaking on the part of the shareholder to increase his share in the capital of the company at a later stage. This is permissible provided that such arrangement covers all the shares and that the company's liability is limited to the value of the paid-up subscribed shares.
It is not permitted to purchase shares using interest bearing loans provided by a broker or any other person, against pledging the shares.
Sharia'a Basis of the Rules
The basis for the impermissibility of buying shares using an interest-based loan provided by a stockbroker or other party against a pledge of the shares is that this is an interest-based transaction secured by shares (see Resolution No. 63(1/7)). In this case, both transactions are prohibited by an explicit source that indicates that Allah, the Almighty, has cursed a person who lives on interest-based transactions, a person who pays such interest, and a person who writes it or acts as a witness for such transactions.
It is not permitted for someone to sell shares that he does not own and the promise of a broker to lend shares to him at the date of delivery does not constitute ownership or possession of such shares, especially if the broker stipulates that the seller must pay the price of the shares so that he can deposit them and earn interest in return for such a loan.
Sharia'a Basis of the Rules
The basis for the impermissibility of selling shares that the seller does not own is that this constitutes selling of an item that one does not own an involvement in a transaction without bearing risk which is prohibited by Sharia'a.
In the legitimate public interest, it is permissible for the relevant authorities to organize trading in shares in such a way that trading will not take place except through licensed stockbrokers.
It is permissible to limit the liability of a company to its paid up capital if such limitation is made public, so that the parties dealing with the company are aware of this fact without any ambiguity or lack of transparency.
It is permissible to sell shares in the company subject to rules and regulations of
the company that do not conflict with Islamic Sharia'a, such as the priority given to the existing shareholders in buying such shares.
It is permissible to pledge company shares, if the company rules do not prohibit the equity holders from pledging their common shares in the company.
Sharia'a Basis of the Rules
The basis for allowing a pledge of shares is that pledging is permissible.
Moreover, anything that can be sold may be presented as a pledge as in the case of shares unless the bylaws of the company state otherwise in which case the conditions stated must be observed.
It is permissible to issue shares "to order".
Sharia'a Basis of the Rules
The basis for the permissibility of "shares to the order of" is that this is a from of transferring the ownership of shares to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to transfer is an implied consent to the transfer of ownership (see the International Islamic Fiqh Academy Resolution No. 63(1/7)).
It is permissible to issue "bearer shares". This is affected by handing over to the investor a certificate that represents a right to the shares and receiving their value in cash or in the form of a financial instrument representing it. In such case, the common ownership of shares represented by the certificate is vested in the holder of the certificate of shares at any point in time.
Sharia'a Basis of the Rules
The basis for the permissibility of "bearer shares" is that it is a sale of shares by a shareholder to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to sell is an implied consent to the sale (see the International Islamic Fiqh Academy Resolution No. 63(1/7)).
It is not permitted to issue preferential shares that have special financial characteristics that give them priority at the time of the liquidation of the company or the distribution of profit. However, it is permissible to afford certain shares, certain procedural and administrative privileges, in addition to the rights of the ordinary shares, such as the right to vote.
Sharia'a Basis of the Rules
The basis for the impermissibility of issuing preferential shares is that the preferential shares are inconsistent with the profit sharing and involve depriving other partners of their fair share of profit (see the International Islamic Fiqh Academy Resolution No. 63(1/7)).
It is not permitted to issue tamatu (enjoyment) shares, which are shares that are redeemed gradually by participating in the net profit, which leads to the eventual redemption of shares from the shareholder before the termination of the company
Sharia'a Basis of the Rules
The basis for the permissibility of issuing tamatu shares is because the funds the certificate holders receive constitute profit in respect their shares. Therefore the certificate holder remain owner of the shares and are entitled to receive proceeds when the company is liquidated (see the International Islamic Fiqh Academy Resolution No. 63(1/7)).
Joint-liability Company
A joint-liability company is a form of personal partnership, which must be publicly declared under a unique name.
A joint-liability company has a juristic personality and a financial liability independent of the liability of the partners. Nevertheless, the partners are personally responsible for the liabilities of the company if the assets of the company are not sufficient to meet the liabilities of the company.
In addition to maintaining proper books for the joint-liability company, the partners are also required to maintain proper books for their business activities outside the company.
Sharia'a Rulings relating to Joint-liability Companies
A creditor of a joint-liability company is entitled to demand settlement of all or part of this rights from any of the partners in any way the creditor deems fit. The creditor is not required to claim such settlement from the company first.
Sharia'a Basis of the Rules
The basis for the validity of the undertaking of partners in a joint liability company to be jointly responsible is that the joint liability in this way is subject to the rules for guarantees. The permission granted by each of them to the others to act on behalf of the company is subject to the rules of agency as in the case of mufawada partnership which combines elements of guarantee and agency. The partners have consented to be liable jointly because there is no gain at the expense of any of the partners and no one is to be cheated (see Abdul Aziz Al Khayyat, Companies 2/235).
The contract of a joint-liability partnership is not binding; hence a partner may withdraw from the partnership on the following conditions:
1. If the partners do not set a fixed duration for the company, otherwise must abide by such duration.
2. A partner should notify the other partners of the intention to withdraw.
3. The unilateral withdrawal from the partnership should not cause damage to other partners.
It is not permissible for the partner to bring in a substitute for himself without the agreement of the other partners.
Sharia'a Basis of the Rules
The basis for the impermissibility of bringing in a substitute partner in a joint liability company when the other partners did consent to it is that the personality of the partner is significant for the partners because the liability of the company includes his personal assets.
Limited Partnerships
Limited Partnerships are a form of personal partnerships, because the personality of the managing partner is important for the sleeping partner and because there is a difference in terms of determination of the ownership of the partners, whereby the ownership is calculated on the basis of shareholdings of different values and not on the basis of shares that are equal in value.
This form of company consists of managing partners, who are jointly liable for the obligations of the company from their personal assets on the basis of joint-liability, and sleeping partners, whose liabilities are limited to the amount of their shareholdings and do not extend to their personal assets. It is permissible to limit the liability of some partner without any consideration for limiting their liability, in which case the company will consist of joint-liability partners and partners with limited liability.
It is not permissible for the sleeping partners to interfere in the operations of the company. The law in most cases does not allow mentioning their names on the date of the registration of the company and only the amounts of the funds collected from the sleeping partners are mentioned.
Sharia'a Basis of the Rules
The basis for the impermissibility of sleeping partners of limited partnership being entitled to interfere in the management of the company is that they have agreed not to do so and this agreement does not affect the rules of partnership.
The management of the company may be delegated either to one of the joint liability partners or to a third party. The sleeping partners are not entitled to take part in the management of the company.
Sharia'a Rulings relating to limited partnerships
Profits are distributed pro rata the shareholdings of the partners or as per the partners' agreement. Losses are borne by the managing partners, regardless of the amount of their shareholdings in the capital. Sleeping partners, on the other hand, are liable for losses only to the extent of the percentages of their shareholdings in the capital of the company.
It is not permissible to stipulate a fixed amount of profit in the form of percentage of the capital or a fixed sum to a sleeping partner.
Sharia'a Basis of the Rules
The reason why the financial liability of the sleeping partners in a partnership limited by shares is limited to their shares is that they are in the position of capital providers in a Mudaraba contract
Company Limited by Shares Companies limited by shares are a form of capital partnerships. The subscription to this company is affected in accordance with shares which are equal in value and they comprise managing partners and sleeping partners.
Sharia'a Rulings relating to the Company Limited by Shares
The managing partners in this company are liable for the obligations of the company from their personal assets on the basis of joint liability. They are in the same position as that of a person who works as a mudarib and at the same time participates in the partnership as a partner. The sleeping partners' liability is limited to the number of shares each partner owns and does not extend to his own assets. In this case, the liability of sleeping partners is equivalent to that of the capital providers in a mudaraba contract. It is permissible to limit the liability of some investors without any consideration for limiting their liability, in which case the company will consist of joint liability partners and partners with limited liability.
It is not permissible for the sleeping partners to interfere in the operations of the company. The law in most cases does not allow mentioning their names on the date of the registration of the company and only the amounts of the funds collected from the sleeping partners are mentioned.
Sharia'a Basis of the Rules
The basis for the impermissibility of sleeping partners of company limited by shares being entitled to interfere in the management of the company is that they have agreed not to do so and this agreement does not affect the rules of partnership.
The management of the company may be delegated either to one of the joint liability partners or to a third party. The sleeping partners are not entitled to take part in the management of the company.
Profit must be distributed pro rata the amount of participation, but the managing partners are entitled to an additional common share beside their shares in the profit as remuneration for their work. Sleeping partners are not liable for any loss except to the extent of their shares in the capital. Losses are borne jointly by the managing partners without any limitation.
It is not permissible to stipulate a fixed amount of profit in the form of percentage of the capital or a fixed sum to a sleeping partner.
Particular Partnership(Muhassa) The definition of Sharika Al Inan applies to the particular partnership. Particular partnerships belong to the personal from of companies, because the partner's financial strength and ability to meet financial obligations from his personal assets are taken into account before concluding a partnership contract.
This type of company has no juristic personality because it is not visible to people other than the partners. This partnership does not have an independent financial liability as an entity.
Sharia'a Rulings relating to Particular Partnership
The rulings for and basis of a particular partnership do not differ from those for an Inan partnership.
The partners are jointly liable for the liabilities of the company from their personal assets.
The contract of a particular partnership is not binding, but if the partners agree to make it binding for a particular period of time, then they shall be bound by such an agreement.
A partner in a particular partnership may terminate his partnership provided that he notifies the other partners of his intention, such withdrawal would not cause damage to other partners or the people doing business with the company. The partnership can be liquidated by way of actual or virtual liquidation of the company's assets.
Sharia'a Basis of the Rules
The basis for the permissibility of unilateral termination of participation in this kind of partnership by any of the partners is that, in principle, unilateral termination of participation is allowed provided such action inflicts no damage to any of the partners as per the saying of the prophet (pbuh) no harm to be inflicted and no reciprocal harm (Sunan Ibn Majah 2/784)