The Laws of Partnership (Companies) in Islam
uploaded 09 Jul 2003


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.â€‌

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).â€‌

The next article will discuss the Company of Equal (Al-'Inan) Insha 'Allah.

Habib ur-Rahman, Journal, 9 Jumaad al-Oola 1424 Hijri / 8 July 2003


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The Company of Equal (Al-'Inan)
uploaded 10 Jul 2003

The Company of Equal (Al-Inan) is one of the most common forms of partnerships in Islam.

The Meaning of Inan
Al Sarkhasi (May Allah have mercy on him) says in his Mabsut Vol 2:
….and it is said that it (Inan) is derived from the reins of a riding animal.

Ibn Qudammah (May Allah have mercy on him) in al-Mughni Vol 5 state:
The meaning is derived from the example of a man driving two horses when he gives equal rein to both.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) in his book The Economic System in Islam:
'Inan means two riders in a race if their horses are equal and their race is equal, so their bridles ('Inan) are equal.
The Meaning of the Company of Equal (Al-'Inan)
Ibn Qudammah in al-Mughni Vol 5 state: The meaning of (inan) partnership is that two persons should participate with their wealth and work on the condition that the generated profits will be shared by them.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam stated
that this is two bodies associating with their properties. Namely, two persons associating with their properties and share the work dividing the profit between them.

It is therefore called a company of 'Inan because the partners are equal in their right of disposal.

In this type of company, the capital is represented by money, because money represents the value of the properties and the sales. It is not allowed to enter into partnership over merchandise unless it was evaluated in monetary terms at the time of contract. The value of the merchandise at the time of the evaluation would represent the capital.

An example of the Company of Inan is where person A makes an offer to person B to establish a health and fitness centre by each providing
آ£10,000 in capital and for both to participate in the day to day management and operation of the centre. Person B accepts. They in turn make an offer to another 3 people, who all accept as partners, to also provide capital and share in the work.

The evidence for this type of partnership is that it was practised at the time of the Prophet and the Sahabah and allowed.

Al-Kasani (May Allah have mercy on him) states in Badai al Sana’I Vol 7: …the Inan contract is valid by consensus of the jurists of the provinces and the practice of the people (i.e. the Sahabah). …. He (the Prophet [salAllahu alaihi wasallam]) approved their actions insofar as he did not proscribe them or deny it to them, and taqrir (tacit approval) is one form of the Sunnah.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam stated: This form of company is allowed by the Sunnah (of the Prophet) and Ijma'a of the Sahabah (consensus of the Companions). People have entered into this form of partnership since the time of the Prophet (salAllahu alaihi wasallam) and the Sahabah.

Conditions relating to the Capital of the Company
It is a condition that the capital is defined and available for disposal. The partnership cannot be formed over an unknown capital, absent property or a debt.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam states that this is because …the capital has to be referred to at the time of division and because the debt cannot be disposed with immediately and this is the aim of the company.

Al-Kasani states in Badai al Sana’I Vol 7 another reason for why the Capital must be defined and present: Among these conditions is the availability of the wealth in the form of an ayn (present thing). It should neither be a debt (dayn) or an absent wealth. If it is so, the partnership is not permitted as Inan or as mufawadah. The reason is that the purpose of the partnership is profit and this is achievable through transactions in the capital. Such transactions are not possible in a dayn or in wealth that is absent.

It is a condition that the capital of the company is one property of all the partners such that neither partner can differentiate his property from the others.

It is not necessary that the capital should be equal in value. Ibn Qudammah in al-Mughni Vol 5 mentioned: Equality in the amount of wealth is not stipulated, and Al-Marghinani (May Allah have mercy on him) says in al-Hidayah Vol 3: Because equality in wealth is not a condition for it as the word (inan) does not require this.

It is also not necessary that the capital should be of the same kind. However, they must be evaluated by one measure so that both shares become one property. It is, therefore, valid for two people to become partners with, for example, Egyptian Pounds and Pakistani Rupees, but these should be evaluated by one value (agreed between the partners) so that there is no difference between them and they become one of the same kind.

It is also conditional that each of the partners has authority over the capital. The Inan (equal) company is based on delegation and trust. The partners trust each other through handing over properties, and by delegating permission to each other to dispose of property. Once the company has been formed it becomes one entity.

Conditions relating to the work and responsibility of the partners
It is obligatory for the partners to start work themselves as the company is established upon their bodies. As such a partner is not allowed to delegate another person to work for the company personally on his behalf. It is also permitted for partners to assign themselves roles such as Operations Director or Head of Finance etc. However, the company as a whole can employ whom it wants and uses the body of whom it likes as its employee to work for the company but not a partner.

Any of the partners can trade in whatever way he feels is beneficial to the company. Each of the partners is also allowed to collect the price and make purchases, to take legal action for and request payment of debt, to pay and accept payment, and to return faulty goods. Each is allowed to hire and lease the capital of the company, as these are benefits to the company and this is similar to selling and buying.

Conditions relating to Profit and Loss
It is not conditional that the partners have equal shares, but it is necessary that they are equal in the right of disposal. With regard to the capital, it is permitted that the partners have different or equal shares, while the profit is divided according to what they agree between themselves. According to what 'Abdurrazzaq narrated in Al-Jami',

'Ali (May Allah be pleased with him) said: 'The profit is according to what they stipulated.'

And al-Sarkhasi mentions in his Mabsut Vol II: …the animal has two reins, one longer than the other and the other one shorter. Thus, it is permitted in this partnership to have equality in capital and profit or inequality. We therefore call it Inan.

With regard to losses in the 'Inan company, it is according to the capital share only. If their shares are of equal value then the loss between them is divided equally, and if the capital is divided in thirds then the loss is divided in thirds. If they agreed on other than that, no value will be given to their stipulations. This is the rule on loss i.e. the loss is based upon the ratio of their capital shares. This is because a company is a form of representation (Wakala). The rule is that the deputy is not held responsible for the loss but the loss is carried upon the property of the deputising person.

Abdurrazzaq narrated in Al-Jami' from 'Ali (May Allah be pleased with him): "The loss (Al-Wadhi'a) is upon the capital and the profit is according to what they stipulated."

In the next article the Company of Abdan (bodies) will be examined Insha 'Allah.

Habib ur-Rahman, Journal, 10 Jumaad al-Oola 1424 Hijri / 9 July 2003


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The Company of Bodies (Al-Abdan)

uploaded 01 Aug 2003
This article, the third in the series on the Company Structure in Islam, explains the second form of partnership in Islam – the Company of Bodies (Al-Abdan).

The Laws of Partnership (Companies) in Islam
The Company of Equal (Al-'Inan)

Definition of Sharikat al-Abdan

Al Sarkhasi (May Allah have mercy on him) says in al-Mabsut Vol II:
...when two workmen participate in the acceptance of work, like tailors or butchers and so on. It is called sharikat al-abdan, because they perform manual labour and it is (also) called sharkat al-sana’i because their capital is their skill.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) states in The Economic System in Islam:

This is a company in which two or more persons participate by their bodies (effort) only, without their capital. They share in that which they gain by their labour, regardless of whether this effort is intellectual or physical in nature.

Examples of al-abdan are partnerships between engineers, doctors, fishermen, porters, carpenters, car drivers and the like, if they work using their intellectual or physical skills or expertise and divide any profit amongst themselves.

Evidence for Sharikat al-Abdan

This form of company is allowed due to what Abu Dawud and al-Athram narrated from Abu 'Ubaydah from his father, 'Abdullah ibn Mas'ud, who said:
"I shared with 'Ammar ibn Yasir and Sa'ad ibn Abu Waqqas in whatever we gained at the day of Badr. Sa'ad came with two captives, while 'Ammar and I brought nothing" and the Messenger of Allah (SalAllahu alaihi wasallam) consented to this to both of them. Ahmad ibn Hanbal said: "The Messenger of Allah (SalAllahu alaihi wasallam) associated them together."

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) in the book The Economic System in Islam states that this Hadith is explicit evidence about the partnership of bodies i.e. a group of the Sahabah were permitted to fight against the enemies, and then to divide amongst themselves the booty if they won the battle.

Roles and Responsibilities of the Partners

It is not necessary that the partners be of the same craft or trade, nor that they are all craftsmen. It is allowed for people of different crafts, trades, professions and expertise to associate in any allowable (Halal) form of profit.

The Hanafi scholar Al-Kasani explained in Badaâi al Sanaâ I that similarity of profession was not necessary because entitlement to compensation in this type of sharikah is based upon being lliable for the performance of work accepted). They are both liable for amal, whether the work is identical or different.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) states that
“Their partnership is valid (Sahih) just as if they were of the same craft.â€‌

It is also acceptable for the partners to perform a particular role in the company, so that for example one administers the company in an operational capacity, another manages the finances and the third works physically by his hands. This means that it is allowed for labourers to associate with other labourers, administrators, clerks and guards, and they can all become partners in a factory. However, it is stipulated that the work they associate together in for the purpose of making a profit be Halal. If the type of work is Haram, then to form a company undertaking such work is forbidden. Abu Yusuf related from Abu Hanifah, saying, “This sharikah is valid in each thing in which agency (wakalah) is valid and is not valid in things in which agency is not valid.

Furthermore anyone of the partners may accept work on behalf of the company. In Al Majallah al-Ahkam al-Adaliyyah, al Uthmani Hanafi Shariâah-Court Text, section 1386 it is mentioned that each partner has a right to accept work on behalf of the partnership. Each of the partners also has the right to collect all of their wages from their employer, and to demand the price of the goods they manufactured from a prospective purchaser.

Similarly, the one who employed them or the one who bought goods from them has the right to pay all wages or to pay the whole price of the goods to anyone of them. He will be cleared of responsibility once he has made the payment to any one of them. The Majallah in section 1387 states the customer is absolved of this liability (the claim for wages) by paying either one of them.

Even if only one of the partners worked, the income is still divided amongst all of them, because the work is guaranteed by all of them together, and through their joint responsibility for the work. The wage in other words, deserves to be shared as the responsibility is carried by all of them. The Majallah in section 1387 states that each partner is the agent of the other in the acceptance of work. For the work that is accepted by one of them, performance is binding upon him as well as his partner. ... Thus the work accepted by one of the partners may be demanded by the customer from either one he chooses. Each partner is legally bound for the performance of the work. He does not have the right to say:
"This work was accepted by my partner and I have nothing to do with it." (Similarly mentioned in Al-Marghinani, al-Hidayah vol 3, Ibn Numjaym al Bahr al Raiq vol 5).

Right to Disposal

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) mentions that
None of them (the partners) is allowed to deputise on his behalf a person as partner in the company or to employ a person to do the work on his behalf as a partner. The partner himself must be the one who handles the work directly as the contract stipulates this in this type of company. The disposal of each partner would be on behalf of the company, and every one of them is bound by the work accepted by his partner.

Al Khirashi, a Maliki Scholar, in Sharh al-Mukhtasar Vol 6 states:
if one of the parties accepts something for working on it, his partner is equally liable for performing work on it, however there is no requirement for joint acceptance of work. If the thing accepted is destroyed, the liability is shared by both parties..â€‌

Each partner is allowed to hire employees and such hiring would be by the company and for the company, even if only one of the partners handled the employment. The employee is employed by the company and is not an individual partner's personal assistant, deputy, agent or employee.

Distribution of Profit

The profit in the company of bodies is distributed according to the agreement of the partners, whether equally or preferentially. The Majallah Section 1388 states that the partners divide the profits among them in accordance with the ratios stipulated, whether equal or unequal.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) further explains
“For it is that which produced the profit and since it is allowed for the partners to differ in work, it is allowed that they differ in profit which is derived from the work.“

In the next article the Company of Body and Capital (Mudharaba) will be explained.

Habib ur-Rahman, Journal, 03 Rajab 1424 Hijri / 01 August 2003




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