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Principles of Islamic Finance

Partnership between two or more companies: Musharakah contract

Principles of Islamic Finance

 

 

 

 

 

 

 

 

The Musharakah is a contract whereby two or more companies create a partnership for a common enterprise or project. It corresponds to the notion of joint venture in the Western world.

With the Musharakah contract, each part participates to the distribution of profits as determined in the contract. If there is no clause about profits' distribution, the contract is void. While about distribution of losses, each part will participate in proportion to the invested capital. This is one of the main features of Musharakah; in fact, due to the social character of Islamic Finance and its obligation to be compliant with Shari'a, the parties of the contract are free to establish about  the distribution of profits, but the losses have to be allocated in proportion to the invested capital.

About nature of the capital, according to the main doctrine,  the capital invested by each part in a Musharakah contract must be liquid, becasue Musharakah is not based on services or goods, but only on money. However, according to other jurists of Islamic law, the liquidity of capital is not a necessary condition of Musharakah.

Mr. Luca Santaniello
Lawyer at Santaniello & Partners

Note: to read more about Islamic Finance, please click here 

Published on 23 July 2012

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