The Laws of Partnership (Companies) in Islam
The Islamic laws of Partnership were discussed widely by the past scholars of Islam and the books of fiqh bulged with their detail. However, with the loss of the Khilafah many of the Islamic thoughts and practices were also forgotten and the Islamic world came to be dominated firstly by the socialist and then by capitalist solutions. Until some even felt that Islam was incapable of addressing and solving contemporary issues.
One of the areas that were severely impacted by this decline was in the understanding and in the practice of business organisation. It is with this in mind that this series of articles demonstrates the unique Islamic thoughts with regards to business structures and organization so that once again Islam is understood beyond the ritual conducts and not studied as a thought only but applied in practice.
Linguistic Meaning
The word for partnership is sharika and some jurists use the word shirkah.
Ibn al-Humam in Fath al-Qadir describes sharika as meaning the mixing of the shares so that one of them cannot be distinguished from another.
Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam (Economic System in Islam) that Ash-Sharika linguistically means mixing two or more shares together such that neither can be distinguished from the other.
Shariah Meaning
Differences in the types of sharikah between the Mujtihideen has meant that there has been difficulty in producing a general shariah definition.
The Maliki scholar Al-Khayyat quotes a definition from al-Dardir in his al-Sharikat that a partnership is “a contract between two or more owners of wealth for joint trade or it is a contract for shared labour and shared profits.”
Ibn Qudamah the Hanbali scholar in al-Mughni defined it as “participation of two or more persons in transactions.
However perhaps the most comprehensive shariah definition is provided by Sheikh Taqiuddin an-Nabhani in Nidaam ul Iqtisaad where the company in Shar'a is defined as a contract between two or more persons, in which they agree to perform financial work with the intention of making profit.
Daleel (Evidence)
Partnership is allowed in Islam because when Muhammad was sent as a Messenger people were dealing with companies and he (salAllahu alaihi wasallam) did not forbid this. Al Bukhari narrated that Abu Al-Minhal said: "I and my partner bought something in cash and credit. Al-Bara ibn 'Azib came to us so we asked him about this. He said: 'My partner, Zaid ibn Al-Arqam, and I did the same and we asked the Prophet (salAllahu alaihi wasallam) about this.' He (salAllahu alaihi wasallam) said: 'That which is in cash you take, and that which is in credit you return it back."' Ad-Daraqutni narrated from Abu Hurairah that the Prophet (salAllahu alaihi wasallam) said: "Allah the Supreme said 'I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them."
Common Conditions
According to the majority of the imams the following form the common elements of the contract of sharika.
Two parties and an offer and acceptance between them
The contract of the company requires the existence of both offer (ijab) and acceptance (qabul), as is the case with all Islamic contracts. An offer occurs when one party says to the other: 'I entered into partnership with you in such and such' and the other party replies by saying, 'I accepted.' These actual words are not necessary but the meaning is.
Subject matter
There must occur in the offer and acceptance something that indicates that one of the parties addressed the other orally or in writing on the matter of partnership over something, and the other accepted. Therefore, an agreement on partnership only does not represent a contract. An agreement to pay money or property for partnership is also not considered a contract as well. Rather, the contract must include the concept of partnership in something.
Right of Disposal
The condition of validity of the partnership contract in Islam requires that the contracted matter be a right of disposal, suitable for representation (Wakala) and what is gained by the disposal is shared between the two partners. It follows that it is invalid to form a company with a person who is prevented from disposal of property e.g. a minor, insane etc.
Dissolving the Company
Dissolution of the company by one of the two partners is valid because it is a permissible contract allowed by Shar'a. It becomes void by the following:
the death of any partner
a partner becoming insane
if a partner was declared incompetent and put under guardianship, if it is a company consisting of two persons.
If one of the partners dies leaving behind a mature inheritor, he has the option to continue with the company and his partner has to permit him to dispose (Tassaruf) in the company. However, he also has the option to demand dissolution of the company. If one of the partners demands dissolution of the company then the other partner must accept his request.
If they were more than two partners, and one of them demanded the dissolution of the company and the rest were happy to continue with the company, then the existing company would be dissolved and renewed between the remaining partners.
Generally if one partner demanded division and the other demanded sale of the company, the demand of division is accepted rather than that of sale. Except in the Mudharaba company (discussed in a future article), where if the worker (Mudharib) demanded the sale of the company and the other partner demanded division, then the demand of the worker will be accepted because his right is in the profit which will not be known except when selling.
Capitalist Companies
The necessity of understanding these Islamic rules has acquired all the more importance in light of the current dominance of capitalist company structures across the world, including the Islamic lands, many of which are invalid and prohibited for Muslims to participate in.
Although it is not the subject matter of this series of articles, a cursory look at one of the most prominent capitalist company structure, the share company (the cornerstone of the modern capitalist economy), serves to highlight its invalidity with the shariah.
No Offer or Acceptance
In the share stock company no agreement occurs between two or more persons. Rather it is a commitment made by an individual will from one side.
Absence of Partnership in Something – No Subject Matter
No concept of partnership in something as no agreement has occurred to carry out a work on something; instead one person commits himself to offer property only.
Invalid Right of Disposal
The share stock company is viewed as a corporate personality which has the right of disposal. In the share stock company those who carry out the actions in the company are the board of directors who are deputies for the shareholders, i.e. for the property partners. However the partner is not allowed in Shar'a, to deputise somebody with the right of disposal and action in the company on his behalf whether he was a property partner or a body partner. The contract of the company is concluded on him personally, so he has to act by himself. So entrusting the disposal to a corporate personality is not allowed.
No Right of Dissolution
The share stock company is permanent, and it continues to function despite the death or the incompetence of any of the partners.
Thus the share company is void and it is prohibited for Muslims to participate in them as a partner.
A detailed study of the share company and other void capitalist company structures such as the unlimited liability company and the co-operative societies can be found in Nidaam ul Iqtisaad fil Islam (Economic System in Islam).
Types of Company Partnership
Ibn Qudamah states in al-Mughni (Vol 5) that partnership contracts are of five types; Al-'Inan, Al-Abdan, Al-Mudharaba, Al-Wujooh and Al-Mufawadha.
Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam “From the examination of partnership contracts in Islam, and the divine rules (Ahkam Shar'iyah) related to them it can be concluded that there are five types of company in Islam. These are Al-'Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation).”
The next article will discuss the Company of Equal (Al-'Inan) Insha 'Allah.
Habib ur-Rahman
Khilafah.com Journal
9 Jumaad al-Oola 1424 Hijri
8 July 2003
To E-mail the author of this article with your questions and comments click below:
Habib@khilafah.com
------------------
The Islamic laws of Partnership were discussed widely by the past scholars of Islam and the books of fiqh bulged with their detail. However, with the loss of the Khilafah many of the Islamic thoughts and practices were also forgotten and the Islamic world came to be dominated firstly by the socialist and then by capitalist solutions. Until some even felt that Islam was incapable of addressing and solving contemporary issues.
One of the areas that were severely impacted by this decline was in the understanding and in the practice of business organisation. It is with this in mind that this series of articles demonstrates the unique Islamic thoughts with regards to business structures and organization so that once again Islam is understood beyond the ritual conducts and not studied as a thought only but applied in practice.
Linguistic Meaning
The word for partnership is sharika and some jurists use the word shirkah.
Ibn al-Humam in Fath al-Qadir describes sharika as meaning the mixing of the shares so that one of them cannot be distinguished from another.
Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam (Economic System in Islam) that Ash-Sharika linguistically means mixing two or more shares together such that neither can be distinguished from the other.
Shariah Meaning
Differences in the types of sharikah between the Mujtihideen has meant that there has been difficulty in producing a general shariah definition.
The Maliki scholar Al-Khayyat quotes a definition from al-Dardir in his al-Sharikat that a partnership is “a contract between two or more owners of wealth for joint trade or it is a contract for shared labour and shared profits.”
Ibn Qudamah the Hanbali scholar in al-Mughni defined it as “participation of two or more persons in transactions.
However perhaps the most comprehensive shariah definition is provided by Sheikh Taqiuddin an-Nabhani in Nidaam ul Iqtisaad where the company in Shar'a is defined as a contract between two or more persons, in which they agree to perform financial work with the intention of making profit.
Daleel (Evidence)
Partnership is allowed in Islam because when Muhammad was sent as a Messenger people were dealing with companies and he (salAllahu alaihi wasallam) did not forbid this. Al Bukhari narrated that Abu Al-Minhal said: "I and my partner bought something in cash and credit. Al-Bara ibn 'Azib came to us so we asked him about this. He said: 'My partner, Zaid ibn Al-Arqam, and I did the same and we asked the Prophet (salAllahu alaihi wasallam) about this.' He (salAllahu alaihi wasallam) said: 'That which is in cash you take, and that which is in credit you return it back."' Ad-Daraqutni narrated from Abu Hurairah that the Prophet (salAllahu alaihi wasallam) said: "Allah the Supreme said 'I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them."
Common Conditions
According to the majority of the imams the following form the common elements of the contract of sharika.
Two parties and an offer and acceptance between them
The contract of the company requires the existence of both offer (ijab) and acceptance (qabul), as is the case with all Islamic contracts. An offer occurs when one party says to the other: 'I entered into partnership with you in such and such' and the other party replies by saying, 'I accepted.' These actual words are not necessary but the meaning is.
Subject matter
There must occur in the offer and acceptance something that indicates that one of the parties addressed the other orally or in writing on the matter of partnership over something, and the other accepted. Therefore, an agreement on partnership only does not represent a contract. An agreement to pay money or property for partnership is also not considered a contract as well. Rather, the contract must include the concept of partnership in something.
Right of Disposal
The condition of validity of the partnership contract in Islam requires that the contracted matter be a right of disposal, suitable for representation (Wakala) and what is gained by the disposal is shared between the two partners. It follows that it is invalid to form a company with a person who is prevented from disposal of property e.g. a minor, insane etc.
Dissolving the Company
Dissolution of the company by one of the two partners is valid because it is a permissible contract allowed by Shar'a. It becomes void by the following:
the death of any partner
a partner becoming insane
if a partner was declared incompetent and put under guardianship, if it is a company consisting of two persons.
If one of the partners dies leaving behind a mature inheritor, he has the option to continue with the company and his partner has to permit him to dispose (Tassaruf) in the company. However, he also has the option to demand dissolution of the company. If one of the partners demands dissolution of the company then the other partner must accept his request.
If they were more than two partners, and one of them demanded the dissolution of the company and the rest were happy to continue with the company, then the existing company would be dissolved and renewed between the remaining partners.
Generally if one partner demanded division and the other demanded sale of the company, the demand of division is accepted rather than that of sale. Except in the Mudharaba company (discussed in a future article), where if the worker (Mudharib) demanded the sale of the company and the other partner demanded division, then the demand of the worker will be accepted because his right is in the profit which will not be known except when selling.
Capitalist Companies
The necessity of understanding these Islamic rules has acquired all the more importance in light of the current dominance of capitalist company structures across the world, including the Islamic lands, many of which are invalid and prohibited for Muslims to participate in.
Although it is not the subject matter of this series of articles, a cursory look at one of the most prominent capitalist company structure, the share company (the cornerstone of the modern capitalist economy), serves to highlight its invalidity with the shariah.
No Offer or Acceptance
In the share stock company no agreement occurs between two or more persons. Rather it is a commitment made by an individual will from one side.
Absence of Partnership in Something – No Subject Matter
No concept of partnership in something as no agreement has occurred to carry out a work on something; instead one person commits himself to offer property only.
Invalid Right of Disposal
The share stock company is viewed as a corporate personality which has the right of disposal. In the share stock company those who carry out the actions in the company are the board of directors who are deputies for the shareholders, i.e. for the property partners. However the partner is not allowed in Shar'a, to deputise somebody with the right of disposal and action in the company on his behalf whether he was a property partner or a body partner. The contract of the company is concluded on him personally, so he has to act by himself. So entrusting the disposal to a corporate personality is not allowed.
No Right of Dissolution
The share stock company is permanent, and it continues to function despite the death or the incompetence of any of the partners.
Thus the share company is void and it is prohibited for Muslims to participate in them as a partner.
A detailed study of the share company and other void capitalist company structures such as the unlimited liability company and the co-operative societies can be found in Nidaam ul Iqtisaad fil Islam (Economic System in Islam).
Types of Company Partnership
Ibn Qudamah states in al-Mughni (Vol 5) that partnership contracts are of five types; Al-'Inan, Al-Abdan, Al-Mudharaba, Al-Wujooh and Al-Mufawadha.
Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam “From the examination of partnership contracts in Islam, and the divine rules (Ahkam Shar'iyah) related to them it can be concluded that there are five types of company in Islam. These are Al-'Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation).”
The next article will discuss the Company of Equal (Al-'Inan) Insha 'Allah.
Habib ur-Rahman
Khilafah.com Journal
9 Jumaad al-Oola 1424 Hijri
8 July 2003
To E-mail the author of this article with your questions and comments click below:
Habib@khilafah.com
------------------
Rasulullah (Sallallahu Alaihi Wasallam) did indeed prophecise the Khilafah’s return when he said:
"The Prophethood will last among you for as long as Allah wills, then Allah would take it away. Then it will be (followed by) a Khilafah Rashida (rightly guided) according to the ways of the Prophethood. It will remain for as long as Allah wills, then Allah would take it away. Afterwards there will be a hereditary leadership which will remain for as long as Allah wills, then He will lift it if He wishes. Afterwards, there will be biting oppression, and it will last for as long as Allah wishes, then He will lift it if He wishes. Then there will be a Khilafah Rashida according to the ways of the Prophethood," then he kept silent.
[Musnad Imam Ahmad (v/273)]
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