DEFINITION of Shirkah
Shirkah is an Islamic finance term that describes a partnership between two or more individuals. The parties involved combine a portion of their capital or labor in order to share in the profits and losses of the business.
Shirkah, in the Islamic theory and philosophy of law, is divided into two categories:
- Shirkat-ul-milk: Joint ownership between the parties involved, where each party has provided capital in order to purchase a particular property.
- Shirkat-ul-'aqd: A partnership created through a contract. This can also be translated to mean a type of joint commercial enterprise.
BREAKING DOWN Shirkah
The cooperative relationship of Shirkat-ul-milk can be created two ways — either voluntary, in which there is a prearranged agreement, or automatically. For example, Shirkah-ul-milk can commence automatically by inheriting the partnership through the death of a family member. Profits and losses are usually shared according to the investors' predetermined portion of the investment.
Shirkat-ul-'aqd, a more formally established commercial venture, is further divided into three subcategories:
- Shirkat-ul-amwal: Each party provides capital to a venture. This is similar to how shareholders provide capital to a corporation through an initial public offering (IPO).
- Shirkat-ul-a'mal: Each party provides labor instead of capital. In this case, all wages earned by the partners would be placed into a wage pool, which is then shared among all parties.
- Shirkat-ul-wujooh: This partnership is based on goodwill. Each party purchases commodities at a deferred price by way of a loan. They then share the profits after selling the commodities at the spot price.