SS 12: Sharikah (Musharaka) and Modern Corporations

What this standard is about

The standard covers contractual partnerships (sharikat al-'aqd) in their traditional forms and in modern forms, including diminishing musharaka. It treats the modern joint-stock company as a form of partnership: shareholders are partners owning units of the venture. It does not cover mere co-ownership of an asset, mudaraba (which has its own standard), sharecropping partnerships, or the regulatory procedures of modern companies.

Why it exists

Partnership is the profit-and-loss-sharing heart of Islamic finance. The standard connects classical partnership law to the modern company and to products like diminishing musharaka home finance. Everyone shares the risk and the reward.

The key rules, simply put

• Each partner contributes capital. Profits are shared according to the agreed ratio.
• Losses are shared in proportion to the capital each partner invested.
• No partner may guarantee another partner's capital.
• A joint-stock company is a form of partnership under Shariah. Its shares represent partnership units.
• In diminishing musharaka, the customer gradually buys the bank's share while paying rent for using the bank's portion. Ownership ends fully with the customer.

An everyday example

A bank and a customer co-buy a $200,000 house. The bank puts in $160,000 and the customer $40,000. Each month, the customer pays rent on the bank's share and buys a slice of it. After 15 years, the customer owns the house outright.

Words to know

• Musharaka (sharikah) — a partnership where parties contribute capital and share profit and loss.
• Diminishing musharaka — a partnership in which one partner's share shrinks over time as the other buys it out.

Source

• AAOIFI Shariah Standard No. 12 — https://aaoifi.com/wp-content/uploads/2020/08/SS-12-Sharikah-Musharakah-and-Modern-Corporations.pdf