Musyarakah

Assalamu 'Alaikum

Musyarakah

Joint venture profit sharing goes the English translation. An Islamic equity concept where business partners contribute capital, not necessarily only in cash, not necessarily in equal portions.
Usually, unless the Musyarakah are run by salaried employees, one of the Partners will be appointed to run the Musyarakah. He will be called the Executive Partner. He may be paid a salary on top of his profit share. Profits are shared according to a pre agreed profit sharing ratio; losses borne according to percentage shareholding. This means profit sharing ratio may differ from capital contribution ratio. The Musyarakah Partners are not allowed to take collateral from the Executive partner to cover business losses but may take collateral to cover losses arising out of his willful default or gross negligence up to the amount of capital contributed. Timing of profit distribution is Syariah neutral, at the sole discretion, and as so agreed, by the Musyarakah partners.

The basics of Musyarakah. As a concept the detractors say we already have one in the form of the modern day Limited Liability Company. Really? Let’s dissect this claim and see whether modern day companies are in fact Musyarakah as propounded by Syariah. First of all the establishment documents, Musyarakah are premised on Syariah compliant Musyarakah Agreements. Limited Liability Companies (LLC) are born on Memorandum and Articles of Association (M&A) which are not targeted to be Syariah compliant, and governed by Company Law which places no importance to Syariah. So at the outset we begin to see the difference. Amongst others the M&A will contain interest penalty clauses for any shareholder who is late in contributing capital. Also no restrictions are placed on what business activity the LLC can involve itself in; Musyarakah are strictly for halal projects. It doesn’t make sense to set up a Musyarakah for a casino does it?

In a Musyarakah profits are shared according to a pre agreed profit sharing ratio whereas in an LLC profit distributions are determined by the salaried employees (read Management). This is then put to a vote to the shareholders giving the ultimate power to decide the profit distributions to the majority shareholder. Major difference with Musyarakah, where profit sharing ratios are agreed before the Musyarakah commences, and the majority Musyarakah Partner is given no possibility to bully or misuse his power. Embodying the principle that money is not might, but justice and fairness is.

The structure of the vehicle is another difference. LLC’s are perpetual companies governed by Company Law. Musyarakah especially the classical ones are structured to have a limited life span. However it is conceivable to have a Musyarakah with a perpetual life span; there being no major Syariah objections here provided the rules of Musyarakah are continually observed. In other words perpetuity falls into the realms of the harus or permissible. It is the Governing Act which is contentious. As it stands in Malaysia, like all other Syariah financing concepts and products, Musyarakah have to comply not only with Syariah as embodied in the Islamic Banking Act, but also Company Law and every other Civil (read Conventional) Law. The only concession made by the authorities is that if the Islamic Banking Act contradicts with the Companies Act, the Islamic Banking Act (IBA) shall prevail. But otherwise that’s it, all Syariah concepts and products must comply with every single civil law!

Hmm, tall order here, are they really serious in implementing Syariah Financing here or it’s just a case of tolerating a square peg in an environment of round holes?! I believe in 1983 when the IBA was introduced the authorities neither had the capacity nor the knowledge and experience to do anything else. Picture Musyarakah in its right and proper place i.e. operating in an environment of full Islamic law; then we begin to see the problem in its true perspective. We don’t believe in Islamic law in the sense of wanting to fully implement it and yet we want Islamic financing. We are torn at being thankful for their interest in Islamic Financing and sad at their continued defiance of the commands of Allah.

Surah AlMaidah
48. To thee We sent the Scripture in truth, confirming the scripture that came before it, and guarding it in safety: so judge between them by what Allah hath revealed, and follow not their vain desires, diverging from the Truth that hath come to thee. To each among you have we prescribed a law and an open way. If Allah had so willed, He would have made you a single people, but (His plan is) to test you in what He hath given you: so strive as in a race in all virtues. The goal of you all is to Allah. it is He that will show you the truth of the matters in which ye dispute;

To each of you we have prescribed a law says Allah swt in Surah AlMaidah Ayah 48. You marvel at their bravery in defying, not a judge, nor a king but their own Maker! What other fears can there be that compares with the fear of the Wrath of Allah? And their arguments on the exceptions applicable to them to excuse themselves from Islamic law sounds like appeal letters to the Inland Revenue as to why such rules should not apply to them. If Sayyidina Ali radhiAllahu an trembles in fear of Allah before the commencement of every Solah; our ibadah presumably are 10 times that of Sayyidina Ali for us to display no fear of our Maker.

Back to Musyarakah, truth is we have no law backing it except if we are an Islamic Bank extending Musyarakah financing where we will then fall under the purview of the IBA. If we are businessmen hoping to do business amongst ourselves on Musyarakah we have no law backing us apart from the strength of our faith. Then solicitors come into their own interpreting under what form of vehicle Musyarakah can operate on, for it is most certainly not an LLC. Until the appropriate law is legislated giving coverage and dignity to Musyarakah we must rely on it being interpreted as a Joint venture vehicle under Company law. Which is fine until we start thinking of implementing it in practice. First we realise that setting up a joint venture we are involved in an unlimited liability structure. In other words if the project incurs a loss and we have run out of capital we have to pitch in more capital whereas in a limited liability company our capital contribution is limited to the initial paid up capital.

Is the LLC position Islamic, under Fiqh can you declare that I have run out of capital therefore God spare me from settling my debts? Does not appear to exude justice and fairness. When a position is fundamentally not tenable in terms of justice and fairness it usually breeds a host of recognised or unrecognised transgressions. If the Syariah position is less appealing to the LLC position could we not structure a Takaful (Islamic Insurance) cover to protect us from such capital calls? We cover the gap and yet remain in full compliance with Syariah.

What about tax? If Zakat is paid then additional tax are considered just harus in an Islamic Economic environment. In an LLC you pay Corporate tax; in a joint venture no tax are placed on joint venture profits under current ruling, tax being payable at the receiver of profits position. This means no tax are paid if profits are not yet distributed. However these are temporary current tax rulings that can change anytime so have no bearing on our discussion; the clear result is we are really unconcerned as far as the tax position of a Musyarakah and an LLC are concerned.

Can we list Musyarakah so that the partners can benefit from capital gains? The answer to this is clearly yes, Musyarakah holdings can be turn into papers of ownership (or Sukuk) and Syariah have no objection to their being bought and sold. So conceivably the value of a Musyarakah can increase with time delivering capital gain to original investors. It would be wonderful to see the first listed Musyarakah paper in the world. One issued unhindered by conventional concerns, held by investors who places his position in the Akhirah as more important than current worldly concerns.

Wassalam,
Zahid