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Among the financial transaction models permitted in Islam, partnership-based contracts occupy a foundational position. Islamic jurisprudence recognises partnership under various terms such as Sharikat, Shirkah, and Mushārakah, reflecting its centrality in commercial life and its ethical emphasis on shared responsibility, trust, and risk.

The moral and spiritual significance of partnership is powerfully underscored in a Qudsī ḥadīth[1] reported by Imām Abū Dāwūd, in which Allah declares: “I am the third among two partners as long as one of them does not betray the other. When one betrays his partner, I withdraw from them.” In a similar narration reported by Imām al-Dāraquṭnī, the Prophet ﷺ stated that the Hand of Allah remains with two business partners so long as they remain honest, but is withdrawn when betrayal occurs. These narrations establish ethical integrity and mutual trust as the very foundation of partnership in Islam.

In the terminology of Islamic jurisprudence (fiqh), Shirkah refers[2] both to a legal condition in which two or more individuals hold an indivisible right over an asset—whether by choice or by circumstance—and to the transactional arrangement that gives rise to such shared ownership. Partnership may thus emerge either through joint ownership or through a contractual agreement. For example, upon a person’s death, his heirs become joint owners of his estate, while a jointly purchased asset creates a partnership of ownership (Shirkat al-Milk). In such cases, no separate partnership contract is required. Any income generated from jointly owned assets must be distributed in proportion to ownership shares, and losses are borne accordingly.

This chapter, however, is concerned primarily with contractual partnerships, in which two or more individuals deliberately enter into a formal agreement to conduct business together. These arrangements are collectively referred to as Shirkat al-ʿAqd, and Islamic jurisprudence identifies several distinct forms within this category, each governed by specific legal principles.

Before examining how modern Islamic banks employ Shirkah-based structures, it is essential to first understand the jurisprudential foundations and regulatory framework of partnership in Islamic law. This foundational understanding provides the necessary lens through which contemporary applications of Mushārakah in Islamic finance can be properly assessed.

Forms of Partnership

Islamic jurisprudence classifies partnership contracts into several forms based on the presence or absence of capital contribution, the nature of participation, and the basis upon which profit entitlement arises. Within this classification, there exist two forms of partnership that do not involve the contribution of capital. These are labour-based partnership (Shirkat al-Abdān) and creditworthiness or reputation-based partnership (Shirkat al-Wujūh).

Shirkat al-Abdān (Labour Partnership)

This is a form of partnership in which two or more individuals possessing expertise in a particular profession—or in different professions—join together without contributing capital, and agree to share the income generated from their labour, either equally or in an agreed ratio.

For example, if two accountants decide to pool and share their respective accounting income without making any joint capital investment, such an arrangement falls under Shirkat al-Abdān.

According to the Shāfiʿī school[3], this type of partnership is invalid. This ruling applies whether the partners are engaged in the same profession or in different professions. The absence of joint capital contribution and the uncertainty regarding the work and income each individual may generate are the primary reasons for its invalidity.

However, the Ḥanafī[4] and Ḥanbalī[5] schools permit this form of labour partnership, whether between individuals engaged in the same profession or in different professions. According to the Mālikī school[6], such a partnership is valid if the partners are involved in the same profession or in closely related professions.

Shirkat al-Wujūh (Creditworthiness / Reputation-Based Partnership)

This form of partnership is based on the personal credibility or reputation (wujūh) of the partners. Two or more individuals jointly purchase goods on credit by leveraging their social standing or trustworthiness, then sell those goods and share the resulting profits among themselves.

According to Shāfiʿī[7] jurisprudence, this arrangement is invalid. The same ruling applies even if one person purchases goods on the basis of his credibility and appoints another person to sell them for the purpose of sharing the profits. The Mālikī school[8] also holds this view.

In contrast, the Ḥanafī[9] and Ḥanbalī[10] schools recognise and permit Shirkat al-Wujūh.

Capital-Based Financial Partnership

The partnerships discussed above are those that take place without capital contribution. When two or more individuals come together and invest capital, the arrangement is known as a capital-based financial partnership (Shirkat al-Amwāl). This type of partnership may take two forms:

1. Shirkat al-Mufāwaḍah

(Comprehensive partnership without joint capital pooling)

This is a partnership contract in which two or more individuals agree to share the income they earn from their physical labour and financial dealings, even without pooling their capital. According to the Shāfiʿī school[11] of jurisprudence, such a partnership is invalid.

According to the Ḥanafī school, Mufāwaḍah refers to a partnership between two individuals who are equal in capital contribution and managerial authority, and who enter into a contract establishing complete equality in responsibility, rights, and profit-sharing. In this form, any business transaction carried out by one partner entitles the other partner to a share in the profit. The Ḥanafī jurists[12] hold that this arrangement is valid even if the partners do not physically merge their respective capitals.

In the Ḥanbalī and Mālikī schools, the condition that partners must be equal in all aspects is not a requirement for Mufāwaḍah. In the Ḥanbalī school, even a contract that combines multiple types of partnerships into a single agreement may be termed Mufāwaḍah, and such a contract is regarded as valid (ṣaḥīḥ)[13].

2. Shirkat al-ʿInān

This is a partnership formed for commercial purposes, where two or more individuals combine their capital and mutually grant each other the right to manage the business. Although there are differences of opinion regarding certain details, there is no disagreement[14] in the Muslim world regarding the general validity of this form of partnership.

Shirkat al-ʿInān is the most widely accepted and unanimously recognised form of partnership. The term may be pronounced as ʿInān or Anān. Linguistically, it conveys meanings such as equality, limitation, balance, and transparency.

A transaction in which one party provides capital while the other undertakes business activity is known as Qirāḍ or Muḍārabah. This too is considered a form of partnership, and it will be discussed in the next chapter. In this chapter, we will focus on understanding the legal principles and rulings related to Shirkat al-ʿInān.

The core elements of this partnership arrangement are the partners, capital contribution, the contractual agreement, and business activity. In Shirkat al-ʿInān, the partners essentially grant one another mutual authority to manage their respective capital. Therefore, the partnership contract must explicitly include reciprocal consent authorising capital management.

If the authority to manage capital is granted only from one side, the partner who receives such permission will have the right to manage the entire pooled capital, while the other partner may conduct transactions only up to the value equivalent to his own share of the capital. However, if the contract stipulates that one of the partners has no right to manage even his own share of the capital, such a partnership becomes invalid.

In Shirkat al-ʿInān, each partner both entrusts his capital to the other and assumes responsibility for managing the other’s capital. As a result, both partners must possess the legal capacity of a principal (muwakkil) who appoints an agent, and that of an agent (wakīl) who accepts agency[15]. In practical terms, this means that the partners must be legally competent adults of sound mind, capable of managing wealth themselves and of delegating such authority to others.

There is no disagreement among jurists that if the capital consists of gold, silver, or currency that substitutes them as legal tender, the partnership is valid. However, differences of opinion arise when other forms of capital are used. The Shāfiʿī school permits the use of assets that can be precisely measured or weighed—such as metals like iron, or commodities such as rice and wheat—as capital contributions. However, items whose value must be determined through inspection, such as livestock, cannot be used as capital according to the Shāfiʿī position[16]. In contrast, the Ḥanafī and Ḥanbalī schools maintain that only gold, silver, or widely accepted currency may be used as capital[17].

All partners must contribute capital of the same type. If one partner invests in US dollars and another in Indian rupees, the partnership will not be valid. The capital must first be converted into a single currency before commencing business operations. Furthermore, the Shāfiʿī school stipulates[18] that, before the partnership becomes effective, the capital contributions of all partners must be physically merged in such a way that they cannot be distinctly separated. The Ḥanafī and Ḥanbalī schools[19] do not impose this requirement of mixing the capital.

Profit and Loss Distribution

From the general Sharīʿah perspective, a person becomes entitled to profit in a transaction only if one of three elements[20] is present:

1. he contributes capital, or
2. he contributes labour, or
3. he bears responsibility and risk.

In ordinary partnerships, partners become entitled to profit through their capital contribution. In a Muḍārabah contract—where one party provides capital and the other provides labour—the working partner becomes entitled to a share of the profit by virtue of his effort and work. In Shirkat al-Wujūh, according to the opinion that permits it, entitlement to profit arises from the risk and liability undertaken by the partner.

In the ordinary partnership known as Shirkat al-ʿInān, which we are discussing here, losses must be borne strictly in proportion to the capital contribution, according to all schools of Islamic jurisprudence. Thus, a partner who contributed 50% of the capital must bear 50% of the loss, while a partner who contributed 25% must bear 25% of the loss.

With regard to profit distribution, the Shāfiʿī and Mālikī schools maintain that profit must be shared in proportion to the capital contribution. In contrast, the Ḥanafī and Ḥanbalī schools allow flexibility, holding that the profit ratio may differ from the capital ratio, provided it is clearly stipulated in the partnership agreement[21].

For example, if in a partnership business “Alif” contributes 75% of the capital and “Bā” contributes 25%, the Shāfiʿī–Mālikī position requires that profits be shared in the same 75:25 ratio. According to the Shāfiʿī school, a partner may not be granted a higher share of profit than his capital ratio merely because he works more or contributes greater effort. Differences in labour do not affect profit and loss distribution.

However, according to the Ḥanafī and Ḥanbalī schools, whether the partners contribute equal or unequal capital, the profit ratio may be determined by mutual agreement as stated in the contract. It is therefore permissible for a partner who contributed less capital to receive a larger share of profit, or for a partner who contributed more capital to receive a smaller share. This flexibility is justified by factors such as greater managerial expertise, longer working hours, or more active involvement in running the business.

That said, Ḥanafī juristic texts[22] clarify that it is not permissible to assign full business management responsibility to one partner while allocating a larger share of profit to a purely sleeping partner.

Another important point to note is that a partnership business may not be formed by stipulating a fixed amount or a fixed percentage of the capital as profit for any partner. Instead, profit must be allocated as a percentage of actual profit—either in proportion to capital (Shāfiʿī–Mālikī) or based on mutual agreement (Ḥanafī–Ḥanbalī). However, there is no harm in paying a fixed monthly amount provisionally, provided that a proper audit is conducted at the end of the year (or another agreed period) and necessary adjustments are made to reflect each partner’s actual profit entitlement. Merely receiving a fixed amount every month without such reconciliation renders the transaction invalid and impermissible.

The majority of scholars hold that Shirkat or Mushārakah is a revocable (jāʾiz) contract, meaning that either party may withdraw at any time. If one partner requests termination, the partnership must be dissolved and profits and losses calculated and distributed accordingly.

However, modern financial systems often involve complex partnership structures, such as joint-stock companies. In such cases, dissolving an entire company merely because one partner withdraws is neither practical nor in the best interests of the remaining partners. Consequently, classical fiqh literature presents alternative approaches for such situations. This issue will be discussed in greater detail in the chapter on joint-stock companies.

Mushārakah in Islamic Banking

Since Mushārakah is generally regarded as a high-risk mode of financing, Islamic banks often show a degree of reluctance in using this contract. However, it is one of the contracts through which Islamic financing can be implemented in its true spirit.

Mushārakah can be utilised for a wide range of financing purposes, including project financing, short-, medium-, and long-term financing for various business ventures, export and import financing, working capital financing, issuance of letters of credit (LCs), and similar financial activities.

It may also be employed by banks to accept customer funds as investment deposits, issue investment certificates, and issue Islamic bonds (Ṣukūk). Furthermore, instead of conventional interbank lending and borrowing, banks can enter into Mushārakah-based arrangements with one another.

In the field of retail banking, a modified form of Mushārakah known as Mushārakah Mutanāqiṣah (diminishing partnership) is commonly used. This form will be discussed in the next chapter.

References:

[1] Ḥadīth reported by Abū Dāwūd, al-Bayhaqī, and al-Dāraquṭnī from Abū Hurayrah (رضي الله عنه).

[2] Kuwait Fiqh Encyclopedia (al-Mawsūʿah al-Fiqhiyyah al-Kuwaytiyyah), Vol. 26, p. 20.

[3] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 282.

[4] Al-Sarakhsī, al-Mabsūṭ, Vol. 11, p. 154; Al-ʿAynī, al-ʿInāyah Sharḥ al-Hidāyah, Vol. 6, p. 183; Al-Zaylaʿī, Tabyīn al-Ḥaqāʾiq, Vol. 3, p. 321.

[5] Ibn Qudāmah, al-Mughnī, Vol. 5, p. 4; al-Buhūtī, Kashshāf al-Qināʿ, Vol. 8, p. 535.

[6] Al-Ḥaṭṭāb, Mawāhib al-Jalīl, Vol. 5, p. 141; Al-Dasūqī, Ḥāshiyat al-Dasūqī, Vol. 3, p. 361.

[7] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 282.

[8] Al-Ḥaṭṭāb, Mawāhib al-Jalīl, Vol. 5, p. 141; Al-Dasūqī, Ḥāshiyat al-Dasūqī, Vol. 3, p. 363.

[9] Al-ʿAynī, al-ʿInāyah Sharḥ al-Hidāyah, Vol. 6, p. 189; Al-Sarakhsī, al-Mabsūṭ, Vol. 11, p. 179.

[10] Ibn Qudāmah, al-Mughnī, Vol. 5, p. 11; al-Buhūtī, Kashshāf al-Qināʿ, Vol. 8, p. 531.

[11] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 282.

[12] Ibn ʿĀbidīn, Ḥāshiyat Ibn ʿĀbidīn (Radd al-Muḥtār), Vol. 4, p. 306

[13] Ibn Qudāmah, al-Mughnī, Vol. 5, p. 22

[14] Al-Kāsānī, Badāʾiʿ al-Ṣanāʾiʿ, Vol. 6, p. 58; Al-Mawwāq, al-Tāj wa al-Iklīl, Vol. 5, p. 133; Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 283; Ibn Qudāmah, al-Mughnī, Vol. 5, p. 12.

[15] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 283.

[16] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 286.

[17] Ibn ʿĀbidīn, Ḥāshiyat Ibn ʿĀbidīn, Vol. 4, p. 310; al-Buhūtī, Kashshāf al-Qināʿ, Vol. 8, p. 480

[18] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 286; Ibn ʿĀbidīn, Ḥāshiyat Ibn ʿĀbidīn, Vol. 4, p. 313

[19] al-Buhūtī, Kashshāf al-Qināʿ, Vol. 8, p. 479

[20] Kuwait Fiqh Encyclopedia (al-Mawsūʿah al-Fiqhiyyah al-Kuwaytiyyah), Vol. 26, p. 60.

[21] Ibn Ḥajar al-Haytamī, Tuḥfat al-Muḥtāj, Vol. 5, p. 291; Al-Kharshī, Sharḥ Mukhtaṣar Khalīl, Vol. 6, p. 45; Ibn ʿĀbidīn, Ḥāshiyat Ibn ʿĀbidīn, Vol. 4, p. 312; al-Buhūtī, Kashshāf al-Qināʿ, Vol. 8, p. 481.

[22] Ibn ʿĀbidīn, Ḥāshiyat Ibn ʿĀbidīn, Vol. 4, p. 312.