Partnerships
Companies — Rules of Partnership and Joint Ventures
📖 At the market of Badr... the day faith triumphed
Three Companions discuss before the battle...
Abdullah ibn Mas'ûd: O 'Ammâr, O Sa'd... what do you say we share whatever we obtain today?
'Ammâr ibn Yâsir: (enthusiastically) Excellent idea! Whatever one of us obtains will be for all of us.
Sa'd ibn Abî Waqqâs: (agreeing) Agreed. We share through our efforts.
After the battle...
Ibn Mas'ûd: (empty-handed) I obtained nothing...
'Ammâr: (likewise) Neither did I...
Sa'd: (leading two captives) As for me, I obtained these two!
Ibn Mas'ûd: (with a smile) May Allah bless us all... We agreed before the work.
They divided the spoils equally, despite the disparity in results!
This is the jurisprudence of partnership: agreement before work, fairness after.
Definition of Partnership
📜 Etymologically:
Partnership (shirka) comes from mixing and blending. The Arabs say: "I partnered with him in the matter" — meaning I entered into it with him.
Terminology
Partnership Definition
Ownership Partnership
Two or more own one thing
Ex: heirs of one house
Management Partnership
Two or more contract to trade together
Ex: partners in a store
Legitimacy of Partnership
📜 From the Book of Allah:
﴾And indeed, many associates oppress one another, except those who believe and do righteous deeds, and they are few﴿ [Sâd: 24]
The khulâtâ' = the partners
📜 On Inheritance:
﴾They are then partners in the third﴿ [An-Nisâ': 12]
If the uterine siblings inherit, they share the third equally.
📜 The Magnificent Hadith Qudsî:
The Prophet ﷺ said: "Allah the Most High says: I am the third of two partners as long as one does not betray the other. If he betrays him, I withdraw from between them."
📚 Reported by Abû Dâwûd and Al-Hâkim who authenticated it
Allah is the Third of Two Partners
As long as they are honest and faithful
Partner ◄── trust ──► Partner
Remain faithful
Success, growth and blessing continue
If one betrays
Blessing leaves them
Consensus of the Ummah: Scholars are unanimous on the permissibility of partnership in general.
Types of Partnerships
Types of Partnerships
Inan, Mufawada, Abdan, Wujuh, Mudaraba
Inheritance, joint gift
Joint stock, LLC, diminishing
First Type: Shirkat al-'Inân
📖 In Baghdad... two partners negotiate
Ahmad the merchant: I have 10,000 dinars, I want us to partner in the silk trade.
Khâlid the merchant: And I have 5,000 dinars. But I know the caravan routes and I negotiate well.
Ahmad: (thinking) Your capital is half of mine... but your expertise is priceless!
Khâlid: What do you say? Profits split 50-50, despite the difference in capital?
Ahmad: (shaking his hand) Deal! I put in more money, and you work more.
The Judge: (later) Correct! This is a shirkat al-'inân. The profit is according to your agreement.
Definition
That two or more people partner with their capitals to work in it and share the profits.
Inan Partnership — The Most Valid of All
Partner 1
Capital + work
Partner 2
Capital + work
Profit
Per agreement, loss per capital ratio
Conditions
| # | Condition | Reason |
|---|---|---|
| 1 | Capital in currency | Ease of valuation and division |
| 2 | Capital known | Avoid ignorance and uncertainty |
| 3 | Profit as percentage | Not a fixed amount but a % |
| 4 | Each partner can act | To realize the partnership |
Rules
| Element | Rule | Example |
|---|---|---|
| Profit | According to agreement | 50%-50% or 60%-40% possible |
| Loss | Proportional to capital | The one with 60% loses 60% |
| Work | Disparity is permitted | One may work more |
Ruling: Valid by consensus — it is the most recognized of partnerships.
Second Type: Shirkat al-Mufâwada
📜 Definition:
That two or more people partner being equal in everything:
- Capital
- Work
- Profits and losses
- Each is a guarantor for the other
Mufawada Partnership — Total Equality in Everything
Partner 1
Capital =
Work =
Profit =
Loss =
Guarantee =
Partner 2
Capital
Work
Profit
Loss
Guarantee
Reason for disagreement: It is nearly impossible for two people to be equal in everything!
Third Type: Shirkat al-Abdân (of Bodies)
📖 Return to Badr... the story of the three Companions
Abdullah ibn Mas'ûd: (narrating) I partnered with 'Ammâr and Sa'd in whatever we would obtain on the day of Badr...
The Narrator: What happened?
Ibn Mas'ûd: Sa'd brought back two captives, and 'Ammâr and I brought back nothing.
The Narrator: How did you divide?
Ibn Mas'ûd: (smiling) We divided among ourselves! Because we agreed before the work.
📚 Reported by Abû Dâwûd and An-Nasâ'î
Definition
That two or more people partner in what they earn through their labor (their bodies) without capital.
Abdan Partnership — Work Partnership Without Capital
Partner 1
Work (no capital)
Partner 2
Work (no capital)
Joint Production
They share profit
Contemporary Applications
| Type | Example |
|---|---|
| Craftsmen | Two carpenters share orders |
| Professionals | Two doctors open a joint clinic |
| Fishermen | Share the catch together |
| Developers | Partner to build an app |
Ruling
| School | Ruling |
|---|---|
| Hanbalis | Valid ✅ |
| Malikis | Valid ✅ |
| Hanafis | Valid ✅ |
| Shafi'is | Invalid ❌ |
Preponderant opinion: Permissible, based on the hadith.
Fourth Type: Shirkat al-Wujûh (of Reputations)
📖 At the market of Medina...
'Âmir: (to his friend) O Sa'îd, we don't have money to trade...
Sa'îd: But we have a good reputation! The merchants trust us.
'Âmir: (enthusiastically) True! If we went to merchant Mahmûd and bought on credit...
Sa'îd: We sell the goods, pay him back and split the profit!
'Âmir: This is what they call... shirkat al-wujûh!
Definition
That two people partner in what they buy through their reputation and people's trust (on credit), then sell it and share the profit.
Wujuh Partnership — Reputation Partnership
Partner 1 + Partner 2
Reputation + prestige (no capital)
Purchase on Credit
Seller trusts their reputation
Sale with Profit
Repayment + profit sharing
Ruling
| School | Ruling |
|---|---|
| Hanbalis | Valid ✅ |
| Hanafis | Valid ✅ |
| Shafi'is | Invalid ❌ |
| Malikis | Invalid ❌ |
Fifth Type: Mudâraba Partnership
(Detailed in the previous lesson)
Comparison: Mudaraba vs Partnerships
📌 Mudaraba: Capital from owner only, work from mudarib only
📌 Shirkat al-Inan: Capital and work from both parties
📌 Shirkat Abdan: Work only from both parties (no capital)
Summary of Traditional Partnerships
| Type | Capital | Work | Ruling |
|---|---|---|---|
| 'Inân | From both | From both | ✅ Consensus |
| Mufâwada | Strictly equal | Strictly equal | ⚠️ Disagreement |
| Abdân | None | From both | ✅ Majority |
| Wujûh | On credit | From both | ⚠️ Disagreement |
| Mudâraba | From one party | From other | ✅ Consensus |
Modern Companies
Joint Stock Company
📜 Definition:
A company whose capital is divided into shares of equal value, tradable, and each partner is only liable to the extent of their shares.
🏦 Joint Stock Company
Capital: 1,000,000 riyals
Divided into: 10,000 shares
Share value: 100 riyals
Profit distributed by share ratio
Liability limited to share value
Shares are tradable
Types of Joint Stock Companies by Islamic Ruling
Types of Joint Stock Companies by Religious Ruling
Halal food, construction, technology
Usury banks, alcohol, gambling
Lawful activity + minor usury transactions
Ruling on Mixed Companies
| Position | Conditions | Ruling |
|---|---|---|
| Absolute prohibition | — | There is ribâ even if minor |
| Permissibility with conditions | 1. Main activity permissible | Permissible with purification |
| 2. Haram revenues < 5% | of haram portion | |
| 3. Purification by donation | to the poor |
⚠️ Important note: The 5% threshold is a contemporary ijtihad (scholarly interpretation) from some Sharia boards, not a consensus. Some scholars absolutely forbid investment in mixed companies.
Limited Liability Company (LLC)
Limited Liability Company (LLC)
Main feature:
- •Partner liability limited to their share
Example:
- •Capital: 500,000 riyals
- •Ahmed's share: 100,000 (20%)
- •Company lost, debts: 800,000
What happens?
- •Ahmed loses only his share (100,000)
- •He's not liable for more from personal wealth
Religious ruling: Permissible ✅
Diminishing Partnership
📖 At the Islamic bank...
The Client: I want to buy a house for 500,000 riyals, but I only have 100,000.
Bank Employee: We have an Islamic solution: diminishing partnership.
The Client: How does it work?
The Employee: We buy the house together — you 20% and us 80%.
The Client: Then?
The Employee: You live in the house and pay us rent for our share (80%). And each month you buy an additional portion from us.
The Client: (understanding) So my share increases and yours decreases... that's why it's called "diminishing"!
The Employee: Exactly! Until you own the house completely.
How Does It Work?
Diminishing Partnership — Diminishing Musharakah
Start: Bank 80% — Client 20%
After 1 year: Bank 60% — Client 40%
After 2 years: Bank 40% — Client 60%
In the end: Client 100%
Bank share decreases until client full ownership
Conditions for Islamic Validity
| # | Condition | Explanation |
|---|---|---|
| 1 | Real partnership | Bank assumes risk of its share |
| 2 | Market rent | Not a fictitious rent |
| 3 | Separate contracts | Purchase separate from lease |
| 4 | No obligation | Client is free not to buy |
⚠️ Warning: Some banks apply diminishing partnership in a fictitious manner!
General Rules of Partnerships
Partner's Guarantee
Guarantee Rule in Partnerships
Each partner is trustee, only liable for transgression or negligence
Principle: Partner is trustee = no liability
Exception: Transgression or negligence = liability
Right of Action
The Rule: Partner's action in company capital = agent's action in principal's capital.
| Permitted ✅ | Forbidden ❌ |
|---|---|
| Normal buying and selling | Donating company capital |
| Delegation per custom | Lending without permission |
| Normal investment | Unusual risk |
Distribution of Profits and Losses
The Golden Rule in Partnerships
"Profit per agreement, loss per capital ratio"
Profit ← per agreement (may vary)
Loss ← per capital ratio (always)
Ex: partners (60%-40% capital) agree 50%-50% profit ✅ — loss always 60%-40%
Causes of Partnership Dissolution
Causes of Partnership Termination
End of term, goal achieved
Destruction of company capital
Mutual termination, withdrawal, death
📖 Stories from the Salaf
The Partnership of Ibn Mas'ûd, 'Ammâr and Sa'd
📖 The immortal lesson from Badr
Abdullah ibn Mas'ûd, may Allah be pleased with him:
"I partnered with 'Ammâr and Sa'd in whatever we would obtain on the day of Badr..."
"Sa'd came back with two captives, and neither 'Ammâr nor I brought back anything."
And yet... they divided the spoils equally!
Why? Because they agreed on the partnership before the work, not after!
Lessons Learned
Lessons from Badr Partnership
Abdan partnership is permissible
- •Work partnership without capital is valid
Partnership is made before work
- •Cannot share what another obtained after work
Fairness between partners
- •Despite unequal results, agreement is respected
Trust is the foundation of partnership
- •They were friends before being partners
🎯 Contemporary Cases
Case One: Creating a Startup
Question: I'm a developer and my friend is a marketer. We want to create a tech company. I'll build the app and he'll bring clients. We don't have capital. How do we split the shares?
Analysis: Shirkat Abdân (partnership through labor) — Developer: programming work, Marketer: marketing work, Capital: none.
Answer: ✅ Shirkat Abdân is permissible
Recommendations:
- Agree on a percentage (50%-50% or according to expected effort)
- Document the agreement in writing — very important!
- Define the mechanism for evaluating work and distribution
- Agree on what happens if one withdraws
Case Two: Buying Shares in Mixed Companies
Question: Aramco has a permissible main activity (oil), but places its surpluses in interest-based banks. Can we buy its shares?
Analysis: Mixed Company — Main activity: oil (halal) ✅, Banking transactions: ribâ (haram) ❌, Proportion: very minor.
Answer: ⚠️ Scholars disagree:
| Opinion | Ruling | Argument |
|---|---|---|
| First | Prohibited | There is ribâ even if minor |
| Second | Permissible with conditions | Main activity permissible + purification |
If you follow the permissibility opinion:
- Purify the portion of illicit profits by donating to the poor
- Calculate the percentage of usurious revenues from financial reports
Case Three: Diminishing Partnership for a House
Question: The Islamic bank offers a house purchase program: the bank pays 80% and I pay 20%, then I buy back their share monthly while paying rent for their portion. Is this permissible?
Answer: ✅ Permissible with conditions:
| Condition | Explanation |
|---|---|
| 1. Real partnership | Bank assumes risks (if house burns, it loses 80%) |
| 2. Market rent | Not a fixed rent regardless of market |
| 3. Separate contracts | Each share purchase by separate contract |
| 4. No obligation | You're not obligated to buy if you don't want |
⚠️ Important warning: Some banks apply diminishing partnership in a fictitious manner!
- Verify: Does the bank assume real risks?
- Or are all risks on you?
Case Four: Partnership in a Restaurant with Different Roles
Question: Three people want to open a restaurant:
- The first puts in 500,000 riyals
- The second puts in 300,000 riyals
- The third will manage the restaurant without capital
How are profits and losses distributed?
Analysis: Shirkat 'Inân + labor (mixed) — Partner 1: 500,000 (capital), Partner 2: 300,000 (capital), Partner 3: labor (management).
Answer:
Profits — According to agreement (example):
| Partner | Percentage | Justification |
|---|---|---|
| The one with 500,000 | 40% | Largest capital |
| The one with 300,000 | 25% | Medium capital |
| The manager | 35% | His management work |
Losses — Proportional to capital only:
| Partner | % loss | Reason |
|---|---|---|
| The one with 500,000 | 62.5% | 500,000 ÷ 800,000 |
| The one with 300,000 | 37.5% | 300,000 ÷ 800,000 |
| The manager | 0% | Did not put capital (loses effort only) |
Case Five: Partner's Betrayal
Question: I discovered that my partner is stealing from the company's money. What should I do according to Sharia?
📜 Remember the Hadith Qudsî:
"I am the third of two partners as long as one does not betray the other. If he betrays him, I withdraw from between them."
Answer — Practical steps:
1️⃣ Document the evidence — Records, receipts, witnesses
2️⃣ Confront him and demand your due — With wisdom and kindness first
3️⃣ If he doesn't respond: courts — Commercial courts
4️⃣ Dissolution + Guarantee — Claim what he destroyed or stole
Remember: The betrayer is liable, and the blessing departs!
💡 Pause and Reflect
📜 The Hadith Qudsî:
"I am the third of two partners as long as one does not betray the other. If he betrays him, I withdraw from between them."
Allah the Most High is with the partners... He protects and blesses them... as long as they are sincere and faithful.
Reflect on Your Partnerships:
🔹 Are you as faithful with your partner's money as with your own?
🔹 Do you document agreements in writing to preserve rights and avoid conflicts?
🔹 In case of disagreement, do you resort to arbitration or take your due by yourself?
🔹 Before partnership, do you inquire about the partner's character and faithfulness?
The Golden Rule:
Successful partnership is built on trust and transparency,
and betrayal destroys the blessing before it destroys the money.
Lesson Summary
🎯 Summary of Partnership Rules
| Élément | Statut | Notes |
|---|---|---|
| Inan Partnership | ✅ Halal | Consensus |
| Mufawada Partnership | 🔄 Disputé | Disagreement |
| Abdan Partnership | ✅ Halal | Majority |
| Wujuh Partnership | 🔄 Disputé | Disagreement |
| Mudarabah | ✅ Halal | Consensus |
| Joint stock (lawful activity) | ✅ Halal | |
| Joint stock (unlawful activity) | ❌ Haram | |
| Diminishing Partnership | ✅ Halal | With conditions |
Rabbi zidnî 'ilman — My Lord, increase me in knowledge