Short answer
Musharakah is a business partnership where every partner puts in capital. Profit is shared by an agreed ratio, while any loss is shared strictly in proportion to each partner's capital. Diminishing musharakah, used for Islamic home finance, is a version where one partner gradually buys out the other.
Sharikat al-'inan, the common partnership, is valid. Profit may be split in any agreed ratio, and a working partner may take more than his capital share, but a sleeping partner may not take a profit share above his capital ratio. Loss must follow the capital ratio. No partner may be guaranteed a fixed sum.
Other madhhabs
- Shafi'i
- Only a partnership in capital ('inan) is valid; partnerships of labour alone (abdan), of credit (wujuh) and the open-ended mufawadah are rejected. Profit must follow the capital ratio.
Explanation
Musharakah means sharing. Two or more people pool money, and often their work, in a business. The Quran mentions business partners and warns that many of them wrong one another, except those who believe (38:24), so honesty between partners is a central duty.
The rules in the Hanafi school:
- Capital: each partner contributes a known amount, normally in cash.
- Profit: shared by an agreed percentage of actual profit. Partners who work may agree a larger share than their capital ratio. Fixing a set sum for anyone voids the profit clause.
- Loss: always in proportion to capital. If you put in 30%, you bear 30% of a loss, whatever profit ratio you agreed.
- Management: each partner is an agent of the others for the business, and a trustee of its assets.
- Ending: any partner may leave with notice, and the partnership ends on a partner's death.
Hanafi law also recognises partnerships of labour (for example, two tailors sharing their earnings) and of credit (buying on credit together and selling), which the Shafi'i school does not.
Diminishing musharakah: you and a bank buy a house together, say 20% and 80%. You rent the bank's share and buy it bit by bit, so the rent falls as your share grows. Mufti Taqi Usmani explains it as three separate arrangements: joint ownership, a lease of the bank's share, and a promise to buy units. See Is an Islamic mortgage halal?
For a partnership where one side gives only money and the other only work, see What is mudarabah? Before signing, have the partnership agreement checked by a scholar.
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Saad 38:24
قَالَ لَقَدْ ظَلَمَكَ بِسُؤَالِ نَعْجَتِكَ إِلَىٰ نِعَاجِهِۦ ۖ وَإِنَّ كَثِيرًۭا مِّنَ ٱلْخُلَطَآءِ لَيَبْغِى بَعْضُهُمْ عَلَىٰ بَعْضٍ إِلَّا ٱلَّذِينَ ءَامَنُوا۟ وَعَمِلُوا۟ ٱلصَّٰلِحَٰتِ وَقَلِيلٌۭ مَّا هُمْ ۗ وَظَنَّ دَاوُۥدُ أَنَّمَا فَتَنَّٰهُ فَٱسْتَغْفَرَ رَبَّهُۥ وَخَرَّ رَاكِعًۭا وَأَنَابَ ۩ ﴿٢٤﴾
[David] said, "He has certainly wronged you in demanding your ewe [in addition] to his ewes. And indeed, many associates oppress one another, except for those who believe and do righteous deeds - and few are they." And David became certain that We had tried him, and he asked forgiveness of his Lord and fell down bowing [in prostration] and turned in repentance [to Allah].
Partnerships are lawful, and partners must deal justly.
Sahih al-Bukhari 2497
Sahih... ما كان يدا بيد فخذوه وما كان نسيئة فذروه ...
"Whatever was hand to hand, take it; whatever was deferred, leave it."
Al-Bara' ibn Azib and his partner Zayd ibn Arqam asked about their joint trades; the Prophet ﷺ let the partnership stand and corrected only the unlawful part.
Where the ruling is recorded
- al-Hidaya, Kitab al-Shirka. Types of partnership and the rules on profit and loss.
- AAOIFI Shari'ah Standards, Standard on sharikah (musharakah) and modern corporations. Including diminishing musharakah.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapter on musharakah and diminishing musharakah. Modern application in banking and home finance.
- Minhaj al-Talibin, Kitab al-Shirka. The Shafi'i limits on types of partnership.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.