MushÉrakah MutanÉqiÎah and Its SharÊÑah Parameters

(Research presented at the Fifteenth Session of the International Islamic Fiqh Academy of the

OIC, held in Musqat, Oman1)

By

Dr. ÑAbd al-SattÉr AbË Ghuddah

Secretary General of the Unified SharÊÑah Supervisory Board of the Dallah Al-Baraka Group

and a member of the Islamic Fiqh Academy

1 See Majallat MajmaÑ al-Fiqh al-IslÉmÊ, Issue No. 15 (1425/2005), Vol. 1.

الرحيم بسم هللا الرحمن

In the name of Allah, the Most Gracious, the Most Merciful

Preface

Praise be to Allah, Lord of the worlds, and peace and blessings be upon our Master,

Muhammad, and upon all of his family and companions.

MushÉrakah mutanÉqiÎah is one of the legitimate methods in Islam for both investment and

for financing by means of assets as a replacement for interest-based financing. It is a good

option, whether for the purpose of increasing wealth or for helping those who deal with banks

to acquire what they need, especially houses, equipment or factories.

The importance of this method lies in the fact that it exemplifies the nature of the Islamic

economy, which is called “a partnership-based economy”, in contrast to the capitalist interest-

based economy.

The attention being paid to the different kinds of partnerships is consistent with the

previously issued recommendation of the Islamic Fiqh Academy to reduce the use of

murÉbaÍah lil Émir bi shirÉ’ as much as possible and expand the use of various risk-sharing

investment methods such as muÌÉrabah and mushÉrakah.2

One researcher reported that mushÉrakah muntahiyah bi al-tamlÊk was implemented for the

first time in Egypt by the Islamic banking division of a commercial bank in partnership with a

tourism company to own a fleet of vehicles for transporting groups of tourists between Cairo

and Aswan. A portion of the profit was allocated to the company for its management effort

2 The fourth recommendation made with Resolution Number 76 (8/7), regarding problems of Islamic banks.

Resolutions and Recommendations of the Islamic Fiqh Academy, 3rd

edition, page 261.

before distributing the remaining profit between the bank and the tourism company in

proportion to their shares in the capital.3

The foundations of this method of financing were laid and its legitimacy in the SharÊÑah was

affirmed at the First Conference for Islamic Banks, which was held in Dubai. This will be

discussed in detail later. It should be noted here that in the recommendations of the

conference, this method was named al-sharikah al-mutanÉqiÎah wa al-muntahiyah bi al-

tamlÊk, which takes into account the two common names for this method.4

Additionally, a paper titled “MushÉrakah MutanÉqiÎah in the Light of Newly Developed

Contracts” was presented at the Thirteenth Session of the International Islamic Fiqh

Academy, held in Kuwait, but it was agreed to delay any decision about it until a future

session in order to allow for further study and research.5

(1)

The Importance of MushÉrakah MutanÉqiÎah

MushÉrakah mutanÉqiÎah is considered the most appropriate and valid method for all kinds

of investments in the current era because:

For the bank: It is an investment method that can be expected to achieve periodical

profits throughout the investment period.

For the other partner (the bank’s client): It encourages him to make ÍalÉl investment,

and it helps him in realizing his ambition to solely own the project in the medium run

since the bank gradually gives up its share in the project.

3 MuÍammad ÑUthmÉn Shubayr, al-MuÑÉmalÉt al-MÉliyyah al-MuÑÉÎarah li al-MaÎraf al-IslÉmÊ (Contemporary

Financial Transactions of Islamic Banks), page 291. 4 The Recommendations of the First Conference for Islamic Banks- Dubai (1399/1979), fatwÉs on financial

transactions, page 21, Dubai Islamic Bank Publications, 1985. 5 Resolution number 122 (13/4), Resolutions and Recommendations of the Islamic Fiqh Academy, 3

rd edition,

page 411. Many papers were presented in the sessions, but they didn’t contain a study of the contracts used in

practice or a discussion of the issues related to them, which led to a postponement of their discussion. These

papers can be found in Majallat MajmaÑ al-Fiqh al-IslÉmÊ, Conference 13.

For the society: It balances out the economy by developing positive [risk-sharing]

relationships rather than negative [risk-transferring] relationships, and this will bring

about justice in distributing economic production.6

(2)

MushÉrakah MutanÉqiÎah as a Way for a Bank to Utilize Its Funds, and Its Advantages

MushÉrakah mutanÉqiÎah is one of the SharÊÑah-compliant ways that an Islamic bank can

invest its funds to secure a profit for itself and its client.

Financing using this method can be used for many types of projects, such as real estate

projects, industrial projects, educational projects, etc., as long as these projects can produce

some profits in the future. Part of the obtained profit is given to the bank for its contribution,

while the remaining amount―or some part of it―is reserved as a payment by the client to

buy the bank’s share. After a stipulated period of time, the client will eventually purchase the

total share of the bank, leading to the exit of the bank from the partnership and leaving the

entire project under his ownership.

The advantages of financing by mushÉrakah mutanÉqiÎah are:

1. It utilizes natural resources to increase production capacities and develop the society.

2. It achieves SharÊÑah-compliant returns and profits for both the bank and its clients

through the investment of money, assets and human efforts.

3. The bank achieves real returns from the investment of its funds in various potentially

risky investment opportunities.

4. It encourages the search for new investment and development opportunities that can

benefit people and develop the community.

5. The bank undertakes investments in medium to long-term projects.

6 Dr. Ezzedine Khojah, AdawÉt al-IstithmÉr al-IslÉmÊ (Islamic Investment Tools), reviewed by Dr ÑAbd al-SattÉr

AbË Ghuddah, (Jeddah: Dallah Al-Barakah Group).

6. One of the main advantages of mushÉrakah mutanÉqiÎah is its ability to secure income

for the bank during the period of its participation in the project. It also enables the owner

of the project, after a stipulated period of time, to pay the value of the bank’s share from

his portion of the project’s income. The bank’s partner will eventually become the sole

owner of a project that generates a good income for him.

(3)

The Definition of MushÉrakah MutanÉqiÎah

MushÉrakah mutanÉqiÎah or al-mushÉrakah al-muntahiyah bi al-tamlÊk has been defined as:

A partnership in which one of the two partners promises to gradually buy the other

partner’s stake until he owns the entire project.7

Or: a partnership in which the bank gives its partner the right to acquire the bank’s

stake in the company gradually or at one go, according to the terms agreed upon.8

Or: a partnership to which the bank contributes capital and promises to relinquish its

rights by selling its share in the partnership to its partners. The partners, on the other

hand, promise to buy the bank’s share in the partnership in one go or gradually, as per

the terms agreed upon. 9

Or: an agreement between two parties to establish joint ownership (sharikat al-milk)

between them in a project, real estate or a manufacturing plant, etc., to be terminated

by gradual transfer of one partner’s share in the partnership to the other through

separate and successive sale contracts.10

7 Shariah Standard No. 12, pertaining to partnership and modern companies, in al-MaÑÉyÊr al-SharÑiyyah,

(AAOIFI Council for Shariah Standards), page 220. 8 Dr. Ezzedine Khojah, AdawÉt al-IstithmÉr al-IslÉmÊ, op. cit.; quoted by MuÍammad ÑUthmÉn Shubayr, al-

MuÑÉmalÉt al-MÉliyyah al-MuÑÉÎarah li al-MaÎraf al-IslÉmÊ, op. cit. 9 ÑAbdullÉh ÑAbdul-Rahim al-ÑAbÉdÊ, al-MawsËÑah al-ÑIlmiyyah wa al-ÑAmaliyyah li al-BËnËk al-IslÉmiyyah

(The Academic and Practical Encyclopedia of Islamic Banks), Chapter 5, SharÊÑah Section, page 325, “The

SharÊÑah’s Stance on Islamic Banks”. What has been mentioned about the topic in these two references is

similar, although the author of the Encyclopedia does not point it out. 10

A research paper by Dr. NazÊh ×ammÉd, Majallat MajmaÑ al-Fiqh al-IslÉmÊ, Issue 13, 2:513.

Or: involvement of the bank in a project with income-generating potential as a partner

who provides all or part of the project’s capital. It is agreed that the bank will receive

a percentage of the real net income and also have the right to hold the entire balance

of the net income that belongs to its partner, or any part of it agreed to, as a payment

by the bank’s partner to acquire the bank’s share in the partnership.

The SharÊÑah Legitimacy of This Type of Partnership:

This transaction combines elements that are permissible in SharÊÑah, and there is nothing in it

that violates any SharÊÑah text or conflicts with any comprehensive principle in Islamic

jurisprudence; therefore, it is permissible.11

Its SharÊÑah characterization and the evidence for

it will be elaborated next.

(4)

The Fiqh Characterization and Components of MushÉrakah MutanÉqiÎah

The Fiqh Characterization of MushÉrakah MutanÉqiÎah:

MushÉrakah mutanÉqiÎah is classified as a type of contractual partnership. It is known [to

jurists] that there are two types of partnership: contractual partnership (sharikat al-Ñaqd) and

joint ownership (sharikat al-milk). Sharikat al-Ñaqd comes into existence by the enactment of

a contract between two parties. On the other hand, sharikat al-milk is a state of diffused joint

ownership by two [or more] parties of a tangible asset as a result of the transfer of ownership

to them by some means such as inheritance or bequest. In the latter form of sharikah no

contractual agreement is contracted between the parties; each of them has an individual

ownership contract, either voluntary or involuntary.

Classifying the applications of partnership is frequently confusing, and the difference in

classification may result in differences in the SharÊÑah rules that pertain to a given

partnership. Among the most important rules are:

11

MuÍammad ÑUthmÉn Shubayr, al-MuÑÉmalÉt al-MÉliyyah al-MuÑÉÎarah li al-MaÎraf al-IslÉmÊ, page 294.

In sharikat al-milk, each partner’s share in any income such as rent that is derived

from the jointly owned property must be equal to his share in the ownership.

Responsibility for loss is also distributed according to the shares in ownership. In

contrast, according to some scholars’ ijtihÉd, in contractual partnership it is

allowed for the partners’ share in any derived income or profit to be different from

their ownership shares.

It is permissible for one partner to give a guarantee to the other partner in sharikat

al-milk because neither of them have any right of disposal in the other’s share (as

will be explained later). For a partner in a contractual partnership to guarantee

another partner’s [profit or capital] is not allowed.

It is permissible in sharikat al-milk for one partner to promise to buy the other

partner’s share at its nominal value, while this is prohibited in a contractual

partnership unless the promise to buy is executed at market value. That is because

a promise to buy a partner’s share at its nominal value is the same as giving a

guarantee, which is prohibited in a contractual partnership.

Al-KÉsÉnÊ12

has explained the main difference between these two types of partnerships, a

point that is very useful in classifying implementations of partnership, especially the

financing of residential properties through mushÉrakah mutanÉqiÎah, which appears to be a

contractual partnership; although some researchers consider it to be a form of sharikat al-

milk.13

Other researchers consider it to be a form of sharikat al-milk for house financing and a

contractual partnership in the context of investments.14

Still other researchers consider it to be

an entirely new form of sharikah; i.e., it is neither a pure contractual partnership nor a pure

joint-ownership partnership. 15

The main difference, as explained by al-KÉsÉnÊ, is:

12

Al-KÉsÉnÊ, BadÉ’iÑ al-ØanÉ’iÑ, 6:56. 13

Dr. NazÊh HammÉd takes the position that mushÉrakah mutanÉqiÎah is a form of sharikat al-milk. See:

Majallat MajmaÑ al-Fiqh al-IslÉmÊ, Issue No. 13; 2:513-51. Although Dr. HammÉd has used al-KÉsÉnÊ’s

explanation to support that view, al-KÉsÉnÊ’s explanation actually supports the opposite of Dr. HammÉd’s

position. This confusion occurred because one of the types of sharikat al-milk is a partnership initiated because

of the partners’ actions, such as engagement in a sale contract. What distinguishes sharikat al-milk from a

contractual partnership is the partnership contract itself, not the sale contract or any other contract. 14

This is the opinion of Shaykh MuÍammad TaqÊ ÑUthmÉnÊ. 15

This is the opinion of Dr. ÑUjayl al-NashmÊ. See Majallat MajmaÑ al-Fiqh al-IslÉmÊ, Issue No. 13, 2:568.

As for sharikat al-milk, the same rule is applied to both of its types. It is that

each of the partners in sharikat al-milk is a stranger with respect to the other

partner’s share; neither has the right to dispose of his partner’s share in any way

without his permission. The permission to dispose [of property] has only two

causes: ownership or authority (wilÉyÉh). Neither partner has authority (wilÉyÉh)

of the other partner’s share, neither by agency nor kinship. (Perhaps what is

meant here is the guardianship or trusteeship of the father or grandfather

[wiÎÉyah]).16

It is established, however, that in contrast to sharikat al-milk, contractual partnership does

involve [mutual] authorization between the partners.

The Components of MushÉrakah MutanÉqiÎah

To clarify the fundamentals of mushÉrakah mutanÉqiÎah, we need to review its overall

structure. MushÉrakah mutanÉqiÎah is originally established as a partnership, and one of the

partners [then] promises to gradually sell his share to the other partner. A sale and purchase

transaction between the two partners occurs each time they decide to reduce the share of the

partner who promised to sell his share.

Therefore, mushÉrakah mutanÉqiÎah involves four activities carried out by the partners. Each

of these activities has its own document:

1. Sharikat al-ÑinÉn;17

this is the contract that is concluded at the beginning.

The sale and purchase of the partnership’s share must not be stipulated as a condition

in the partnership contract. A partner’s promise to sell or purchase must be separated

from the partnership contract, and the sale and purchase will be exercised through a

separate contract. It is not permitted to link either contract with the other by a

stipulated condition.18

2. A promise by the bank to sell off its share to the other partner:

16

The two types of sharikat al-milk that al-KÉsÉnÊ referred to in his explanation are: 1) sharikat al-milk that

originates because of the partners’ actions; 2) sharikat al-milk that originates without the partners’ actions; for

example, inheritance. An example of the action in the first type is purchasing something or accepting a gift. This

is different from the action required to initiate a contractual partnership, which is the contract of partnership

itself. 17

Editor’s note: Sharikat al-ÑinÉn: a contract between two or more persons to become partners in the capital

each has contributed, with the understanding that they will work together with it and share the profit at

determined rates. 18

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit., Clause 1/5

The document containing this promise must be separate from the partnership contract

but concurrent with it.

The bank’s promise should not be reciprocated with a binding promise from the other

partner. This is to avoid a binding bilateral promise, which would cause the process to

resemble a sale contract, for it is known that a sale contract cannot be concluded to

take place in the future, according to the majority of scholars, with the exception of

Ibn Taymiyyah.

3. A lease contract is concluded by which the customer will rent the bank’s share of the

housing:

This is done in case the customer needs to make use of the housing during the period

in which he is acquiring ownership of it.

4. Gradually selling the bank’s share to the other partner through [a series of] sale

contracts:

The sale in mushÉrakah mutanÉqiÎah takes place gradually, bit by bit.

Each of these sale contracts is concluded when there is a desire to [further] own [the

bank’s share]. It is not allowed to conclude any sale contract in advance because a sale

cannot be concluded to take place in the future, as was mentioned earlier.

These four activities will be explained in further detail later.

(5)

The Practical Steps in Implementing MushÉrakah MutanÉqiÎah

Financing by mushÉrakah mutanÉqiÎah goes through several stages: assessment, stipulation

of conditions, and implementation. These differ from one bank to another. The stages for

financing real estate projects will now be enumerated, along with a detailed explanation of

the contracts that have to be concluded throughout the process and the SharÊÑah rules

associated with them.

1. Applying for financing by mushÉrakah mutanÉqiÎah.

2. Assessing the application and approving it.

3. The client has to fully pledge a piece of land of his own and everything associated

with it to the bank. This mortgage is not to guarantee the bank’s share in the

partnership but to fulfil all the bank’s rights relating to this contract.

4. The right to utilize the usufruct of the building (project) is delegated to the bank.

Therefore, the bank will have the right to conclude leasing contracts on the project

and collect rentals.

5. The income derived from the project will be distributed between the bank and the

client according to their capital contribution to finance the project.

The client’s share of the income will be determined and credited to a special account

with the bank for the purpose of buying the bank’s share. It is also possible in certain

circumstances that the bank will give the client for his personal use part of his share in

the income that has been saved in the special account.

6. Determining the duration of the contract.

7. The income tax will be paid by the bank or the client, and whatever is paid will be

considered as an additional contribution by that party to the partnership. Start-up

expenses such as architectural and consultation fees, licensing fees and mortgage

documentation fees can be paid by the client or the bank. The amount paid will be

recorded in the special mushÉrakah mutanÉqiÎah account as a contribution by the

party who paid it.

The construction costs in some instances may exceed the financing amount

contributed by the bank. When faced with such a situation, the bank may increase its

share in the partnership by covering the extra cost, or the client may cover the extra

cost, as per previously stipulated conditions in the contract. In either case the share of

the payer [in the project] will be increased accordingly.

8. The implementation stages of the project and and expenditures on them (including the

appointment of a supervisor).

9. Leasing the building: After the building has been completed and received, it is now

ready to be rented out. The right to utilize and lease the building belongs to the bank

because the bank is the manager of the project, as per the conditions stipulated in the

mushÉrakah contract concluded with the client. However, the bank can discuss with

the client/partner and get his opinion. The leasing and rental collection process takes

place in the following order:

a. Leasing contracts that stipulate the agreed terms and conditions are to be

signed by the bank and the lessees. It is also possible for the client to have his

signature on these contracts too. The leasing contracts contain a special

provision which extends the enforcement of the stipulated conditions after

the bank exits the partnership.

b. The bank will handle the follow-up with the tenants to collect the rentals on

their due dates according to the agreed conditions. A special register has to

be prepared for each rented property and each tenant to ensure that the rental

fees are collected on time.

c. The income derived from the leasing process will be distributed between the

bank and the client according to the conditions stipulated in the contract. The

distribution process will be repeated each time rents are collected.

10. Liquidation of the project: when the client has fully purchased the bank’s share by

means of his share of the rental income, the partnership will be liquidated. The bank

will no longer share the income, and the whole project will belong solely to the

client. All leasing contracts and rights will be transferred to the client on that date.

Thereafter, the client will be the only one who is authorized to collect rental fees.

The steps of financing a manufacturing project or a project to build a college,

university or hospital through mushÉrakah mutanÉqiÎah are the same as those

mentioned earlier for the real estate project: application, economic feasibility study,

and successive contracts.

11. Distributing the income derived from the partnership: It is stipulated that the bank

gets a specific share from the net income derived from the project while the client

gets the balance. The client’s share of the net income will be reserved to purchase

the bank’s share in the partnership, but it is also possible to pay out to the client

some of his share for his personal use. The following points have to be considered

when calculating the net income:

a. The entire income derived from the project as well as all expenses incurred

have to be recorded in the profit and loss statement in accordance with

accepted accounting principles.

b. Depreciation of assets is to be calculated according to the percentages

prescribed with regard to income tax, and it has to be recognized in the profit

and loss statement.

c. It can be stipulated that the bank’s share in the net profit will be reduced in

subsequent years as a result of changes in the partners’ ownership shares.

This condition can also be on some other basis, for example:

i. First and second year: 50% of the net profit goes to the bank and the

other 50% goes to the client.

ii. Third and fourth year: 40% of the net profit goes to the bank and the

other 60% goes to the client.

iii. The subsequent years: 30% of the net profit goes to the bank and the

other 70% goes to the client.19

(6)

The Partnership Contract (and Capital Contribution)

MushÉrakah mutanÉqiÎah is a form of capital partnership (sharikÉt al-amwÉl) in fiqh

terminology. It is derived from sharikat al-ÑinÉn, in which all partners must contribute to the

capital at whatever ratio is agreed upon. Therefore, every partner has to contribute to the

partnership’s assets, whether it is in the form of cash, or properties such as the land on which

the building will be erected, or equipment required for the project.

Losses―if any―will be borne by each partner according to his/her share in the capital. In

each period of the partnership, the loss-sharing ratio will be adjusted in proportion to any

changes in the partners’ shares in the capital. 20

19

The previous steps were mentioned in a working paper presented by Jordan Islamic Bank in a meeting held

for investment directors of Islamic banks. These steps don’t really differ from those practiced by other banks. 20

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit., Clause 5/4.

Some contracts―before they were amended―restricted the capital contribution, in the form

of cash, to the bank alone. This cannot be considered mushÉrakah.

Al-MawsËÑah al-ÑIlmiyyah wa al-ÑAmaliyyah li al-BËnËk al-IslÉmiyyah21

referred to this issue

and mentioned that if the client does not contribute to the capital then the partnership will

become muÌÉrabah in which the bank is the rabb al-mÉl while the client who is managing

the project is the muÌÉrib.

Therefore, in the amended contracts, the client has to contribute a piece of land that has been

appraised or is required to cover any extra expenses above the amount given by the bank.

Covering such expenses is considered the client’s contribution to the capital.

(7)

The Binding Promise

The Inclusion of a Promise of Ownership Transfer in MushÉrakah MutanÉqiÎah:

The inclusion of a promise by the bank to transfer its ownership share to its partner is what

makes mushÉrakah mutanÉqiÎah different from a permanent partnership. The possibility that

ownership transfer will occur in a partnership without previous arrangement doesn’t make

such a partnership mutanÉqiÎah, for this is a possibility of any partnership.

The promise of gradual ownership transfer―in one of its forms―is a promise that binds only

one of the partnerships’ two parties. In most cases it is a promise by the bank to the client, and

it is intended to achieve two important goals: first, it enables the bank to exit from the

partnership so that it can invest its capital in other projects and other forms of contracts, and

second, it enables the bank’s partner to complete his ownership of the project until he

becomes its sole owner, which was the main reason behind his involvement in the project in

the first place.

It is also possible for the client to make such a binding promise to the bank. The bank may

want to exit the partnership so that it does not become a burden upon it, especially some

special partnership projects that the bank’s personnel do not have the qualifications to operate

21

ÑAbdullÉh ÑAbdul-Rahim al-ÑAbÉdÊ, al-MawsËÑah al-ÑIlmiyyah wa al-ÑAmaliyyah li al-BËnËk al-IslÉmiyyah

(The Academic and Practical Encyclopedia of Islamic Banks), Section 5, relating to SharÊÑah matters..

and manage on an ongoing basis. In this case the bank can get a binding promise from the

client to gradually own its share.

A binding promise on one party is an issue that has been dealt with before, and it is not the

concern of this paper. The Islamic Fiqh Academy has issued a resolution regarding a binding

promise in murÉbaÍah, and it is applicable to any other type of contract.

Confusion with BayÑ al-WafÉ’ Because of the Ownership Transfer:

Some researchers have raised the following suspicion about mushÉrakah mutanÉqiÎah:

MushÉrakah mutanÉqiÎah is similar to bayÑ al-wafÉ’ and is, therefore, prohibited. The

similarity is that the bank buys its share in the partnership and derives benefit from it until the

other partner pays the bank to acquire it. This is similar to bayÑ al-wafÉ’, in which the lender

buys a piece of property from the borrower and benefits from its usufruct until the borrower

makes full repayment.

In reality, mushÉrakah mutanÉqiÎah is not at all similar to bayÑ al-wafÉ’ because in bayÑ al-

wafÉ’ the buyer is the owner of the property, according to the general implications of the sale

contract, but at the same time he cannot be a true owner because of the condition that requires

him to return the property when the borrower repays his debt. Therefore, the sale contract is

defective because the condition contradicts the essential requirements of the contract. In the

case of mushÉrakah mutanÉqiÎah, the bank enjoys all its rights as a partner and assumes all

its contractual obligations. This transaction only contains a promise by the bank to sell it

share in the partnership to the other partner if the other partner has sufficient money to buy

the share.22

A Binding Bilateral Promise between the Two Parties to Transfer Ownership:

The meaning of a bilateral promise (muwÉÑadah) is that each of the two parties promises the

other to perform a specific action in the future. MuwÉÑadah is a partnership formula that

requires the first party to promise to buy something and the second party to promise to sell it.

22

AmÊrah MashÍËr, al-IstithmÉr, page 289.

However, if the commitment to buy or sell is issued by one party only, then it cannot be

considered as muwÉÑadah even if the promisee accepts the promise. The reason is that this

acceptance is an agreement to benefit from the promise; it is not another promise made in

response to the first promise. If the promisee is promised that he will be sold something,

accepting it means that he now has the right, but not the obligation, to buy. On the other hand,

if he responds with a promise to buy, then that would be considered muwÉÑadah.

Both unilateral and bilateral promises can be either binding or nonbinding. If the promise was

made conditional, then it is binding according to the ×anafÊ School. 23

If the promisor caused the promisee to become involved in a matter he would not have

become involved in had it not been for the promise, then the promise is binding according to

MÉlikÊ opinion. This view has been confirmed by the decisions and fatwÉs of a number of

symposia and conferences discussing Islamic banking issues.24

If a bilateral promise is devoid of indicators as to whether it is binding or nonbinding, then

the determining factor is need. QÉÌÊ KhÉn, a ×anafÊ scholar, wrote, “MuwÉÑadah can be

binding; it is made binding to fulfil people’s needs.”

The Islamic Fiqh Academy has issued two resolutions regarding binding promises: The first

one permited binding unilateral promises, while the other prohibited binding bilateral

promises.

Here is the text of the Islamic Fiqh Academy’s resolution:

Bilateral promises are permitted in murÉbaÍah sales on the condition that either

or both parties have the option to annul the sale; however, if there is no such

option, such a promise is not allowed because a binding bilateral promise in a

murÉbaÍah sale bears a similarity to the sale transaction itself. In that case the

condition is laid down that the seller must be the owner of the commodity being

sold in order that no dispute arises, based upon the prohibition of the Prophet

(peace be upon him) of people selling what they do not possess. 25

It is well known that there is no prohibition of a binding bilateral promise, as such, in the

SharÊÑah. It was only prohibited in the abovementioned Islamic Fiqh Academy resolution in

the context of murÉbaÍah, for the resolution discusses bilateral and unilateral promises with

reference to it. A binding bilateral promise between a purchase undertaker and one who will

23

Ibn Nujaym, al-FawÉ’id al-Zainiyyah, page 100 24

See: the resolutions of the Second Conference for Islamic Banks, held in Kuwait. 25

The Resolutions of the Islamic Fiqh Academy, Resolution 41, page 92.

sell by murÉbaÍah is similar to a contract, which will lead to a person selling what he does

not own.

The motive behind this prohibition is the laxity [of Islamic banks] in abiding by the

parameters of murÉbaÍah in their actual practice, especially the prohibition of contracting

with a client before the bank owns the property. That is because a binding bilateral promise in

this case becomes similar to a contract, even though it is not.26

Therefore, it is clear that a binding bilateral promise in murÉbaÍah has a special legal status

different from other transactions, such as a binding bilateral promise to establish or dissolve a

partnership. Based on that, there is no reason to prohibit a binding bilateral promise in

mushÉrakah mutanÉqiÎah when the bank makes a binding promise to transfer ownership.27

(8)

A Contract for the Client to Lease the Bank’s Share in MushÉrakah

“It is permissible for one party in mushÉrakah mutanÉqiÎah to rent the other party’s share for

a known rental and for any specified period of time. Each partner will continue to be

responsible for the basic maintenance of his share at all times.”

The general rules of leasing are applied here. The validity of the lease is not impaired by the

fact that each partner owns a diffused portion of the property, since it is possible [for the

lessee] to benefit from the leased property in its entirety. That is because the lessee/partner

owns part of the subject matter outright, and he owns the usufruct of the bank’s portion

through the leasing contract. Therefore, it is possible for the client to benefit from all of the

subject matter being leased.28

Some versions of mushÉrakah mutanÉqiÎah contracts contain clauses to organize this leasing

process by giving the bank the right to conclude leasing contracts after considering the

partner’s opinion. If the leasing contract is concluded with a person other than the bank’s

26

Regarding the permissibility of a binding bilateral promise and the fact that it is not a contract, see “ÑUqËd al-

TawrÊd wa al-MËnÉqasÉt”, by Shaykh MuÍammad TaqÊ ÑUthmÉnÊ, one of the papers presented during the 12th

session of the Islamic Fiqh Academy. 27

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit. 28

In this case, there is no need to resort to timeshares or dividing the physical space when dividing the usufruct.

This practice is used when leasing a jointly owned share from one of the two partners.

partner, the contract is valid and binding upon the partner since he has appointed the bank to

manage the project.

Scholars have agreed that leasing out one’s share in the partnership to one’s partner is

allowed. As for leasing out the same share to a third party, it is permitted by the majority of

scholars (the ShÉfiÑÊs, MÉlikÊs, AbË YËsuf, AÍmad and MuÍammad ibn al-×asan al-

ShaybÉnÊ) but not by AbË ×anÊfah, Zafr and AÍmad, in another opinion reported from him.29

(9)

The Sale Contracts to Transfer the Bank’s Share to the Client and Terminate the

Partnership

The Conditions for Selling Partnership’s Shares to a Partner:

“It is permissible for one party to make a binding promise to allow the other party to

gradually own his shares in the partnership through a sale contract concluded at the time of

[each] purchase. The share is sold at its market value or at the price agreed upon at the time

of the purchase. It is not permissible to stipulate sale of a share at its nominal value because

that is tantamount to guaranteeing the shares of the partnership by one of its partners.”

According to the recommendations of the First Conference for Islamic Banks:

“The conference holds the view that the bank’s sale of its share to the client after completing

the partnership should be done through a separate contract. This gives the client the freedom

to sell his share to the bank or anyone else and also gives the bank the freedom to sell its

share to the client or anyone else.”

The last statement is to be interpreted as applying to a promise by the client to transfer

ownership, with the bank having the option to buy or not to buy the share. In case the binding

promise is made by the bank, the client holds the option, not the bank.

It is fine to organize the acquisition of the bank’s share by its partner in any way that achieves

the goals of both parties; for example:

29

Al-BadÉ’iÑ:4:187; SharÍ al-RawÌ, 2:409; al-MughnÊ, 6:137; al-Muhadh-dhab, 10:395; al-DardÊr, al-SharÍ al-

ØaghÊr, 4:95; (quoted from al-MawsËÑah al-Fiqhiyyah, 1:263).

1. The client undertakes to allocate his portion of the partnership’s profit or income to

acquire a percentage of the bank’s share in the partnership.

2. The subject of the partnership is divided into shares, of which the bank’s partner

periodically acquires a certain number until he manages to acquire the entire portion,

which will make him the sole owner of the subject of the partnership.30

The recommendations of the First Conference for Islamic Banks, which was held in Dubai,

suggested two ways to end the partnership:

1. A bank agrees to partner with a client to fully or partially finance a project with

income-generating potential. It is agreed that the bank will receive a percentage of

the actual generated net income, and at the same time the bank has the right to hold

the entire balance of the net income that belongs to its partner, or part of it, as a

payment by the bank’s partner to settle the original amount that the bank has

provided to finance the project.

2. The portions of the bank and the other partner in the partnership are determined in the

form of shares that collectively represent the entire value of the partnership’s subject

matter (real estate, for instance). Each partner gets his share in the income generated

by the project. The bank’s partner can acquire a certain number of the bank’s shares

every year, which will reduce the bank’s shares until the bank’s partner manages to

acquire all the shares and become the sole owner of the project.31

(11)

SharÊÑah Parameters of MushÉrakah MutanÉqiÎah

In addition to the SharÊÑah requirements previously mentioned, which are intended to prevent

mushÉrakah mutanÉqiÎah from becoming mere cash financing hidden behind a partnership

contract, there are other SharÊÑah requirements for mushÉrakah mutanÉqiÎah, which are

contained in the standard on partnerships issued by AAOIFI. They are:

30

The previous reference, Clause 8/5.

31

The Recommendations of the First Conference for Islamic Banks, op. cit.

1. The general rules for partnership have to be applied (especially not guaranteeing

partnership shares for any partner).

The general rules for partnerships have to be implemented on mushÉrakah

mutanÉqiÎah, especially the rules for sharikat al-ÑinÉn.32

One example of these rules

is the prohibition of either partner stipulating a guarantee from the other, whether it is

a guarantee of his share of the capital or the income.

The purpose of this rule is to prevent this new method of partnership from becoming

cash financing by the bank in which the client is obliged to repay the financing

amount while the bank enjoys a cash flow from the partnership.

2. It is compulsory to decide each partner’s share in the profit or the income

derived from the partnership.

It is possible to agree to make the basis of the partners’ share in any income or profit

different from their ownership shares. It is also possible, as the ownership shares

change, to adjust the profit shares accordingly or to maintain them as they are.

However, there can be no contravention of the principle that losses must be

distributed among the partners according to their ownership shares.33

It is also not

permissible to stipulate that a fixed amount be set aside from the profit for one of the

partners [before distributing the rest of it].34

3. The contract must be free from any condition that gives the bank the right to

recover its capital contribution.

Some mushÉrakah mutanÉqiÎah contracts express the bank’s right to recover

whatever it has contributed in financing the project; i.e., entitlement to profit depends

on one party (the bank) [first] recovering all the capital it contributed. This text

contradicts the intended effects of partnership because allowing one party to recover

all his capital will definitely cause a loss to the other partner. This expression was

used in the recommendations of the First Conference for Islamic Banks in Dubai

when explaining the way to end mushÉrakah mutanÉqiÎah and transfer the entire

32

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit., Clause 3/1, and its

sections that organize the general rules of partnership. 33

Ibid., Clause 5/5. 34

Ibid., Clause 5/6.

ownership to the client by “keeping the remaining share of the income or part of it to

settle the original financing amount contributed by the bank”.35

This expression was

used in the recommendation to explain and highlight the objective of the mushÉrakah

mutanÉqiÎah, which is to have the bank exit the partnership with some degree of

expected capital safety when its share is acquired by the client.

When this expression was used in mushÉrakah mutanÉqiÎah contracts, it carried the

meaning of a condition, which is unacceptable for it is a way of guaranteeing the

share of one of the partners.

One academic publication on banking has highlighted this issue and criticised the way

it was expressed by saying: “This expression causes misgivings because it resembles

ribÉ. The bank entered into this transaction in the first place on the condition that it

would get back whatever it contributed in full and on top of that get a percentage of

the project’s profit.”36

4. Acquiring the Bank’s Share at Its Market Value:

The client’s acquisition of the bank’s share in the partnership must be at its market

value, not at the original amount contributed by the bank to finance the project. This

is to avoid a guarantee of its capital, since the SharÊÑah has categorised mushÉrakah

mutanÉqiÎah as a contractual partnership. 37

A fatwÉ by the FatwÉ and SharÊÑah Supervisory Board of Dubai Islamic Bank states:

“The SharÊÑah rules that prohibit swindling and taking people’s properties for less

than their real value prohibit acquiring a partner’s share at its nominal value. This is

because the constant fluctuation in the market value of things will lead to injustice to

one of the parties. Therefore, the bank’s share being sold to the client has to be

appraised at its current value as dictated by the laws of supply and demand, and this is

to be determined by a trustworthy, expert appraiser.”38

5. Financial expenses that may arise from mushÉrakah mutanÉqiÎah must be borne

by the partners in proportion to their shares.

35

The Recommendations of the First Conference for Islamic Banks, op. cit. 36

MushÉrakah, SÊlsÊlah al-TÉjir al-ØadËq (Partnership: The Ethical Trader Series), (Sudan: The FatwÉ and

Research Department of TaÌÉmun Islamic Bank, 1406/1986), pages 18-19. 37

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit., Clause 5/7. 38

The fatwÉs of Dubai Islamic Bank, FatwÉ No. (33).

The expenses that may arise from mushÉrakah mutanÉqiÎah are borne by the

partnership fund and not by one of the partners. In some contracts the client is made

to bear them.

These expenses include taxes, maintenance costs and insurance premiums, if any.

The standard on partnership states, “It is not permissible to require one of the partners

to bear maintenance and insurance costs alone, even if the justification is that the

subject of the partnership will eventually be transferred to him.” 39

A solution to this matter has been provided in some contracts by adding the amount of

any expenses or taxes paid by one of the parties to his share in the partnership. This

method achieves the goal of charging these expenses to the partnership fund.

This rule is relevant to a situation in which the [purchasing partner] is unable to end

the partnership by gradually reducing the bank’s share. In that case, the project must

be sold to one of the partners or to a third party at a price agreed by both parties or a

price determined by experts. Whatever losses occur will be borne by the partners

according to their ownership shares.40

All praise is for Allah, Lord of the Worlds.

39

Shariah Standard No. 12, pertaining to partnership and modern companies, op. cit., Clause 5/3. 40

Dr. Wahbah al-ZuÍayli, “Al-MushÉrakah al-MutanÉqiÎah wa ÎuwaruhÉ” (“MushÉrakah MutanÉqiÎah and Its

Forms”), Majallat MajmaÑ al-Fiqh al-IslÉmÊ,, Issue no. 13; 5:498.

Appendix

The Most Important FatwÉs Issued on MushÉrakah MutanÉqiÎah:

1. The fatwÉ of the First Conference for Islamic Banks - Dubai:

This was the first fatwÉ regarding mushÉrakah mutanÉqiÎah and represented the laying of a

foundation for this method of partnership. The following is the text of the fatwÉ:

Al-ShÉrÊkah al-MutanÉqiÎah wa al-MuntahÊyah bi al-TamlÊk:

First: The Method:

It is similar to a permanent partnership except that the bank gives its client the right to

acquire its ownership share gradually or in one go according to the terms agreed to and the

nature of the process. The acquisition is done by selling the bank’s shares to the client after a

certain period of time.

Second: The Resolution:

It was concluded in the conference that al-mushÉrakÉt al- muntahÊyah bi al-tamlÊk, in which

the bank want to invest its money, must take one of the following forms:

The first form: The bank and the client agree to set their shares in the capital of the

partnership and its conditions. The conference holds the view that the bank’s sale of its share

to the client after completing the partnership should be done through a separate contract. This

gives the client the freedom to sell his share to the bank or to anyone else and also gives the

bank the freedom to sell its share to the client or to anyone else.

The second form: The bank agrees to partner with a client to fully or partially finance a

project with income-generating potential. It is agreed that the bank will receive a percentage

of the actual generated net income, and at the same time the bank has the right to hold the

entire balance of the net income that belongs to its partner, or part of it, as a payment by the

bank’s partner to settle the original amount that the bank has provided to finance the project.

The third form: The portions of the bank and the other partner in the partnership are

determined in the form of shares that collectively represent the entire value of the

partnership’s subject matter (real estate, for instance). Each partner (the bank and the other

partner) gets his share in the income generated by the project. The bank’s partner can acquire

a certain number of the bank’s shares every year, which will reduce the bank’s shares until

the bank’s partner manages to acquire all the shares and become the sole owner of the

project.41

A fatwÉ by the SharÊÑah Board of Al-Rajhi Banking Corporation for Investment:

The involvement of the corporation in an istiÎnÉÑ or mushÉrakah mutanÉqiÎah

contract with its clients:

Some clients who own lands approached the Project Financing Department requesting them

to put up buildings for them on their lands. These clients do not have any collateral to be

given to the corporation except for these lands. Practically speaking, it is difficult to sell

property occupied by its owner dwelling there, and therefore, it is recommended that the

corporation follow one of the following two ways to proceed with the project:

The first way: ...

The second way: This way is suitable for clients who have no intention to invest their

properties, and it can be explained briefly as follows:

The corporation signs a mushÉrakah mutanÉqiÎah contract with the client. The client

contributes land whose market value is known after having been appraised. The corporation

covers the construction costs. The capital of the partnership is then divided into equal shares,

and each partner is entitled to a certain number of shares according to his capital contribution.

The contract must state that the client has the right to acquire a share belonging to the

corporation after every periodic valuation of the building and the land so that the contract will

end with the client owning the entire property. 42

41

The FatwÉs of the First Conference for Islamic Banks - Dubai, 1399/1979; FatÉwÉ SharÑiyyah fÊ al-AÑmÉl al-

MaÎrafiyyah (FatwÉs on Financial Transactions), (Dubai: Dubai Islamic Bank, 1985), page 22. 42

Resolutions of the SharÊÑah Board of Al-Rajhi Investment and Exchange Corporation, Resolution Number

140. Chapter 2, pages 26-27.