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Islamic Business Partnerships

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Type of Business Partnerships in Islam

All partners must decide what they will be contributing to the business (money, assets or labor) and what will be their share in profits and losses. ​​​​​​

1.
Both partners invest money

The ratio of profit for each partner must be agreed with the following conditions:

 

  • Must be agreed at the time of effecting the contract. If profit proportions are not agreed, then the contract is invalid

  • Must be determined in proportion to the actual profit accrued to the business. For example, it is correct to say that a partner would get 25% of the profit made

  • Must NOT fix a lump sum amount for any partner. For example, it is incorrect to agree USD 10,000 per month

  • Must NOT be in proportion to the capital invested by the partner (that is, profit must not be a fixed rate tied with the partner’s investment amount). For example, it is incorrect to agree 25% of investment amount done by the partner

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[Common Business Rules are applicable.]

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Download a contract template:

2.
Both partners put in some form of work

Money earned is distributed according to an agreed ratio.

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[Common Business Rules are applicable.]

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Download a contract template:

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3.
One partner provides money and the other does the work

This is called MUDARABAH in Arabic


The ‘Capital Provider’ invests money while the ‘Managing Partner’ invests his labour in managing the business.

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GENERAL TERMS

  • The Capital Provider may choose to limit activity to a particular business or leave the decision to the Managing Partner

  • There could be more than one Managing Partners

  • The Managing Partner(s) may do work that is normally done in the course of the business, however work that is extraordinary requires Capital Provider’s approval

  • The Managing Partner cannot claim a fixed monthly salary, but he can claim basic subsistence expenses (like food and accommodation) and abnormal expenses like for example for inter-city travel

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Download a contract template:

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PROFIT DISTRIBUTION

Money earned is distributed according to an agreed ratio.

 

The ratio of profit for each partner must be agreed with the following conditions:

  • Must be agreed at the time of effecting the contract. If profit proportions are not agreed, then the contract is invalid

  • Must be determined in proportion to the actual profit accrued to the business. For example, it is correct to say that a partner would get 25% of the profit made

  • Must NOT fix a lump sum amount for any partner. For example, it is incorrect to agree Rs. 10,000 per month

  • Must NOT be in proportion to the capital invested by the partner (that is, profit must not be a fixed rate tied with the partner’s investment amount). For example, it is incorrect to agree 25% of investment amount done by the partner

  • May be set to different rates depending on conditions or situations. For example, if trade is in food items the rate is x %, and for non-food items the rate is y %

 

 

LOSS DISTRIBUTION

The Capital Provider’s liability is limited to his investment.

The Managing Partner’s liability is limited to his work done.

 

 

CONTRACT TERMINATION

  • Default is that either party can terminate at any time with a notice. If this is unsuitable, then the parties may mutually agree a time period in which the contract cannot be terminated except in specified unusual circumstances.

  • If the contract is terminated and assets are in cash, distribute profit based on the agreed ratio.

  • If all assets are not in cash, give the Managing Partner a chance to sell and determine actual profit.

  • If the parties agree, a minimum time-limit for termination may be fixed.

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[Common Business Rules are applicable.]

4.
Both partners put in money as well as labor

If the partnership is established with investment of wealth by both partners, and the work is done by both of them or by someone whom they appoint, then this is called an ‘anaan partnership.

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  • It is NOT required that both partners should put in an equal amount of wealth or equal amount of labor. 

  • The percentage of profit of each partner must be known to each partner.

  • The specific share of profits between the partners depends on what the partners agreed to, NOT on the amount that each partner contributed. 

  • It is NOT permissible for the partners to agree that one of the partners should have a fixed share of the profits 

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[Common Business Rules are applicable.]

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Download a contract template:

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5.
No partner invests any money or work; they purchase things on deferred price and sell them at spot

Profit earned is distributed according to an agreed ratio.

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[Common Business Rules are applicable.]

In all options:

  • Common Business Rules are applicable

  • Make a contract as per the agreements. Include clauses for contract termination in cases of death or a partner’s voluntary exit.

 

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