FROM time immemorial man has endeavoured to increase his wealth through various means, some of which require him to jointly participate with others to achieve the objective.
More often than not, the personal capacity of an individual is not enough for him to pursue his dream of amassing assets.
Due to this limitation there is always a need for him to invite others to his side so that they can work together.
More frequently this sort of arrangement was carried out based on the understanding that everyone knew his rights and obligations.
Partnerships are thus formed in a number of ways with the common objective of pursuing certain activities jointly to generate profits which will be shared according to an agreement reached beforehand.
When Prophet Muhammad started his mission in Mecca he found the people in general practised a form of partnership whereby an individual with surplus capital would entrust another person, who had business talent, with
money to do business with and any profits gained would be shared by them according to a certain percentage as agreed from the outset.
The Prophet sanctioned this practice and it thus became Islamic by virtue of his approval.
This is the origin of what is known today as mudarabah in Islamic finance.
Some reports also suggested that even the Prophet, before his prophethood, used to receive mudarabah funds from Khadijah who later became his wife and that he excelled in managing the funds which generated good returns. He was reported to have even travelled to Syria to do business.
With this beginning, mudarabah has become one of the widely used methods of investment carried out in the Muslim world for more than a thousand years. Muslim scholars and jurists of the past had discussed detailed rules governing this type of investment mode, especially those relating to the rights and obligations of the parties in a mudarabah contract and the ways the profits are to be divided.
Capital is provided by one party who will leave the management of the business or investment entirely in the hands of the other party – the entrepreneur who is in fact his legal agent. In return for his service, the agent will receive a share of the profits that the venture produces according to an agreed ratio.
One important legal implication of this arrangement is that throughout the period of the mudarabah the agent is considered as holding the capital as a trustee-cum-manager to the capital provider and he is not to be held liable for possible loss or diminution of the value of the capital unless he is proven to be at fault or negligent.
However, should he exceed the mandate given by the capital provider or be in breach of conditions or terms stipulated in the contract, his legal position automatically changes to that of someone whose liability is based on strict liability.
That means whatever happens to the capital after that period, even if due to an act of God or misfortune, he will straightaway be liable for the loss.
Another form of partnership known in Islam is musharakah which literally means a joint venture by mutual agreement, when two individuals or more form a partnership to carry out a business venture to share whatever proceeds, income or profits that may be generated in accordance with a pre-determined ratio or percentage as agreed between them.
These days the concept of musharakah and sharikah are widely employed in the field of Islamic finance, especially in the area of trade financing.
Yet, the true spirit behind the concept is that of a partnership in business activities rather than a mode of financing.
Sharikah mufawadhah, for example, is astructure whereby all partners stand as agents and guarantors among themselves and they share equal rights and obligations, whereas the sharikah inan structure allows for the partners to be treated differently as they are only agents among themselves.
On top of all these, there is one type of musharakah that is very peculiar to Islamic finance because it is diminishing in nature.
This is known as musharakah mutanaqisah which is more of a financing tool than an investment instrument. This form of sharikah comes into being when two or more individuals jointly acquire an asset that is later rented or leased to one of the parties for a certain period.
Using his portion of the generated rental proceeds, the partner who intends to exclusively acquire the assets at the end of the period will gradually purchase the shares of his partner or partners in the assets. Eventually, he could buy all the shares of the other partner or partners and the sharikah will end by then.
This discussion leads us to the concept of modern corporations or companies with all their rules and regulations as practised today.
They are basically similar to Islamic sharikah by virtue of the fact that they come into being when at least two individuals “form” the company and have it registered with the Registrar of Companies.
However, the practical operation of modern companies and corporations is not necessarily in line with the rules and conditions of the Islamic sharikah .
Modern companies issue share and loan capitals of various kinds, some of which are subject to interest.
Debentures, for instance, are resorted to by modern companies when they want to raise additional money through debt instruments, which are, in essence, interest-based and thus not approved by Islam. They may also issue securities that pay a fixed rate of return to holders – a process which is also contrary to Islamic law.
Then there are the issues of preference share that gives more priority to a certain class of shareholders in relation to profits or returns and the right to repayment of capital upon dissolution of the companies, not to mention derivatives instruments the corporations may use to minimise risks. Today, Islamic finance is one of the fastest growing sectors of the economy.
According to one estimate, in eight to 10 years’ time 40% to 50% of all deposits in the Muslim world will be deposited with Islamic financial institutions.
Money or liquidity is one thing but the way it is invested or utilised is more crucial a point to ponder if halal or Islamic returns is the objective.
Sinceinvestment and business activities using large sums of money as capital are usually carried out by corporations of various categories, there is a strong reason for investors in Islamic funds or instruments to be
sure of the syariah compliance aspects of these companies not only from the perspective of the securities they issue but also, more importantly, the way these corporation are managed – whether for instance their Memorandum and Article of Association contain any provision which is contrary to Islamic rules.
And the biggest of all is the question of whether the concepts of limited liability and artificial legal entity as inherent in modern corporations are accepted in Islam. If the answer is affirmative what are the conditions for their validity?
In order to discuss more about corporations, shares, securities, corporate finance and corporate governance, the Institute of Islamic Understanding Malaysia (Ikim) will hold a seminar on “Corporation, Corporate Law and Corporate Governance: Islamic Perspective” on Sept 14 and 15.
The co-organisers include the Securities Commission, Malaysian Institute of Corporate Governance and Company Commission of Malaysia. Participation is open to the public, especially the business community and the corporate sector.