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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,
Khilafah.com 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.
Proofs
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,
Khilafah.com 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, Khilafah.com
Journal, 03 Rajab 1424 Hijri / 01 August 2003
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Quotations
It is narrated by
'Abdullah ibn 'Amr that the Messenger of Allah said, "It is
not allowed that three be in the open (during a journey) and that
they do not make one of them their leader." - Abdullah ibn
'Amr
Narrated
Abu Bakra: During the battle of Al-Jamal, Allah benefited me with
a Word (I heard from the Prophet). When the Prophet heard the news
that the people of the Persia had made the daughter of Khosrau
their Queen (ruler), he said, Never will succeed such a nation
that makes a woman their ruler.
Volume
9, Book 88:
"With just 6% of
the worlds population the US and Canada consume nearly 30% of the
worlds energy. The US with just 3% of proven reserves uses a
quarter of global oil production. The biggest consumers are in
North America, Western Europe and Japan." - New
Internationalist Magazine- Issue 330 December 2000
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