Comprehensive Review Of Musharakah

Published Date: 02 Nov 2017

ABSTRACT

Purpose – The main purpose of this paper is to provide a comprehensive review of musharakah

and its potentials for Islamic venture capital model in commercializing research and development product.

Design/methodology/approach – Based on an extensive literature review, this paper aims to

highlight, explain and discuss the basic principles underlying implementation of musharakah and its distinctive features as a potential Islamic venture capital model.

Findings – This research reveal the potential applicability of musharakah in the venture capital industry especially for commercializing research and development product. It is mostly applicable at the early stage of the venture capital.

Research limitations/implications – As a relatively new and untested mode of venture capital, the paper offers a theoretical overview only. Further quantitative studies may be conducted to compare the performance of musharakah venture capital with other conventional venture capital structure.

Originality/value – The comprehensive overview of the musharakah venture capital and underlying issue discussed in this paper is a very good foundation for further studies on the topic. It gives a clear theoretical base for practical implementation of musharakah venture capital.

Keywords – Entrepreneurship, Intellectual property, Islamic finance, Musharakah venture capital, Private equity

Paper type – General review

TABLE OF CONTENTS

ABSTRACT

TABLE OF CONTENTS

GLOSSARY OF TERMS

1.0 Introduction

1.1 Background

1.2 The Importance of the Study

1.3 Research Aim

1.4 Research Objectives

1.5 Research Questions

1.6 Research Design

1.7 Limitations of the study

2.0 Literature Review

2.1 Innovation, Commercialization and the Entrepreneurial Roles

2.1.1 Research and innovation as an economic catalyst for Malaysia

2.1.2 Bringing innovations to market: the entrepreneurial tasks

2.1.3 Different dimensions of entrepreneurship

2.1.4 Islamic view on entrepreneurship

2.1.5 The technology-based entrepreneurs

2.2 Venture Capital and Private Equity

2.2.1 Overview of venture capital and private equity

2.2.2 Common shari’ah-based structures for Islamic PE and VC

2.2.3 Nature of venture capital and private equity

2.2.4 Differences between venture capital and private equity

2.3 Intellectual property-based investments

2.3.1 Intangible assets and the connected economy

2.3.2 Islamic intellectual property-based investment

2.3.3 Intellectual property rights (IPR) from the Islamic perspective

2.3.4 IP law in Malaysia

2.4 Overview on musharakah

2.4.1 The musharakah contract

2.4.2 Legality of musharakah

2.4.3 Types of musharakah

2.4.4 The nature of injected capital

3.0 Research Methodology

GLOSSARY OF TERMS

Dhawat-ul-amthal

Type of commodity, which if destroyed can be compensated by similar commodity in quality and quantity e.g. rice, wheat

Dhawat-ul-qeemah

Commodities, which cannot be compensated by the similar commodities e.g. cattle

Fiqh

Islamic jurisprudence

Hadith

Record of the sayings, deeds or tacit approvals of the Prophet Muhammad (peace be upon him).

Ijma’

Consensus of Opinion

Inan

Unequal-shares partnership

Mudarabah

A mode of business where two or more persons participate: one with capital and the other (or others) with labour and enterprise. The financier shares the profit with the entrepreneur according to mutually agreed terms. In the case of loss, it is borne by the financier alone.

Mufawada

Equal-shares partnership

Musharakah

A mode of business in which more than one person join with capital and labour on the basis of profit-and-loss sharing.

Qiyas

Analogical deduction.

Shirkah al-milk

Joint ownership of two or more persons in a particular property

Shirkah al-aqd

Contractual partnership, agreement between two or more parties to combine their assets, labour or liabilities for the purpose of making profit

Syari’ah

Divinely revealed law, identified by its primary sources, Al-Qur’an, sunnah, ijma’and qiyas

Sunnah

Refers to the normative behaviour of the Prophet Muhammad (peace be upon him) as evidenced by his utterances, and his tacit approvals.

Note: This glossary has been compiled from a variety of sources including the Securities Commission of Malaysia, selected articles and publications.

LIST OF FIGURES

FIGURE NO. TITLE PAGE

1 Venture Capital & Private Equity in a Business Life Cycle 13

2 Category and Sub –category of Intellectual Property 15

3 The category of Shirkah 19

LIST OF ABBREVIATIONS

AAOIFI - Accounting and Auditing Organization for Islamic Finance

EPU - Economic Planning Unit

ETP - Economic Transformation Program

IP - Intellectual Property

IPO - Initial Public Offering

IPR - Intellectual Property Rights

MOHE - Ministry of Higher Education

MyIPO - Intellectual Property Corporation of Malaysia

NHESP - National Higher Education Strategic Plan

NIPP - National Intellectual Property Policy

OIC - Organization of Islamic Countries

PE - Private Equity

PEMANDU - Performance and Management Delivery Unit

R&D - Research and Development

R&D&C - Research and Development and Commercialization

SME - Small and Medium Enterprise

TTO - Technology Transfer Office

USOs - University Spin-Offs

VC - Venture Capital

WIPO - World Intellectual Property Organization

1.0 Introduction

1.1 Background

Malaysia aspires to become a high-income nation that is both inclusive and sustainable by the year 2020 as enlisted in its Economic Transformation Program (ETP) [1] . To achieve the target, entrepreneurship has become one of the key enablers for the country to be out of the middle income threshold. Entrepreneurial activities thus must become the chosen career path of the population. Since entrepreneurship relies much on innovation and research activities, Malaysia is well on the track by having several research and development (R&D) organizations with a huge number or research and development findings. These findings consist of both tangible (physical products) and intangible products (intellectual properties) that may be introduce to the mass market. However, when it comes to mass production and at the stage of sales, the researchers and their respective organization face problems to succeed. This can be seen when there are a lot of research and development products that had failed to be commercialized [2] . Several studies have been conducted on this issue and few researchers observed that financing or funding are one of the most critical problem that is limiting the commercialization potential. Amran Md. Rasli (2005) mentioned that key areas of challenges identified to improve the commercialization rate are mainly in the areas of funding, industry link, incentive mechanism, manpower and technology transfer infrastructure while Noor Inayah et al. (2011) listed three challenges facing the commercialization process which includes timeliness, incentive and rewards and University-industry interactions.

Malaysian government is giving more importance in R&D sector. The reason is because successful result from R&D and innovation plays a key role in advancing Science & Technology in a knowledge-based and innovation-driven economy. For example, Malaysian government has established a special ministry called Ministry of Science, Technology and Innovation (MOSTI) to provide guidance and policies to encourage research universities and institutes to increase the productivity and competitiveness of research findings in market.

University research commercialization is relatively new in Malaysia and thus the Universities have set up Technology Transfer Office (TTO) which is responsible for every aspect of the commercialization coordination activities from the development, diffusion and exploitation of patent policies and strategies, to the management of industrial liaisons and licensing activities and the organization of different forms of support to academic start-ups (Jensen 2001). Others have established the university spin-off firms (USOs) and there have been a significant growth of fund to support USOs to facilitate the creation of research-based ventures (Rasmussen 2008).

1.2 The Importance of the Study

Malaysia as an emerging market economy and developing country needs the venture capital industry to helps promote entrepreneurship and economic development. This is in line with the Malaysian government’s economic plans that have been laid out in the Financial Market Master Plan launched in March 2001. The Master Plan enlisted venture capital activity as an important economic catalyst that will contribute to the growth of Small and Medium Enterprise (SME). The Plan also has also laid out the establishment of the Islamic venture capital in addition to the available pool of financial instrument in Malaysia. Based on Recommendation 7.5 of the Financial Market Master Plan, it is stated that Malaysian venture capitalist should form smart partnership with venture capitalist in the Organization of Islamic Countries (OIC) to establish Islamic funds because it will enhance the pool of available funds in Malaysia.

Apart from the Financial Market Master Plan, Under the Tenth Malaysia Plan, the Government is committed to investing in creativity, including efforts such as stimulating entrepreneurship, revamping school curriculum, focusing on R&D and promoting availability of risk capital. The Government will provide a larger pool of funds for venture capital, especially on a mudarabah basis (risk sharing) through co-investment with private sector funds. The Government will target to increase R&D expenditure during the Tenth Plan period through a combination of greater public R&D funding combined with facilitation support for private sector R&D [3] .

If this is the case, is there an alternative rather than the government focusing on mudarabah venture capital and apart from government assistance, is there a possibility of private investors participating in the Islamic venture capital industry to help facilitate the commercialization of research findings? Therefore, this research aims to address this question or problem statement by analysing the potential of using musharakah as the Islamic venture capital model among the venture capital companies in Malaysia by focusing on commercializing the R&D product. Analysing the potential of musharakah venture capital model in this research is broken down into several parts as seen below. The research aim is narrowed down into several objectives. This research focuses on musharakah used for equity financing in the venture capital and not as a mode of financing for debt.

1.3 Research Aim

To investigate the potential of using musharakah as an Islamic venture capital model in commercializing the research and development products or findings.

1.4 Research Objectives

To investigate how musharakah arrangements could be an appropriate form of shari'ah compliant venture capital funding among Malaysian venture capital companies in Malaysia.

To investigate whether musharakah venture capital model could facilitate in commercializing research and development findings.

To identify the possibilities of using musharakah venture capital model in developing entrepreneurial activities among researchers.

To identify the investment criteria that is appropriate for musharakah venture capital model.

To investigate the suitable exit avenue for musharakah model in the venture capital contract.

1.5 Research Questions

Is musharakah venture capital model feasible to be apply for commercialization of R&D products?

How musharakah could help in facilitating the commercialization of research and development findings?

What is the best musharakah venture capital model structure for the joint venture between investors and researchers?

Which stage of the business cycle is the musharakah best applied?

What is the appropriate exit mechanism for musharakah venture capital contract?

What do venture capitalist look for before investing in a new product?

1.6 Research Design

According to Naresh & Mark (2006), there are two different types of approaches to research design which are deductive and inductive. Deductive implies that the conclusion is derived from a known premise of something known to be true whereas the latter approach implies that general propositions are established on the observation or particular facts.

Strauss and Corbin (1990) defined qualitative research as any kind of research that produces findings not arrived at by means of statistical procedures or other means of quantification. In addition, the authors indicated that the analysis in this type of research is a qualitative one that involves a nonmathematical analytic procedure that results in findings derived from data gathered by a variety of means.

Earlier Merriam (1988) had identified some assumptions that undergird qualitative research. She described these assumptions as follows;

"Qualitative research assumes that there are multiple realities-that the world is not an objective thing out there but a function of personal interaction and perception. It is a highly subjective phenomenon in need of interpreting rather than measuring. Beliefs rather than facts form the basis of perception. Research is exploratory, inductive, and emphasizes processes rather than ends. In this paradigm, there are no predetermined hypotheses, no treatments, and no restrictions on the end product. One does not manipulate the variables or administer a treatment. What one does is observe, intuit, sense what is occurring in a natural setting-hence the term naturalistic inquiry."

Based on the above premises, the deductive approach and qualitative study thus has been chosen for this research since the research starts with a literature overview of previous studies which later on is compared with the empirical findings. This study will also propose several recommendations and suggestions on the appropriate musharakah venture capital model that could be applied to the research and development settings.

1.7 Limitations of the study

Most available and accessible literatures on the research topic focuses on musharakah as a mode of Islamic financing while the scope of venture capital literatures focus on conventional venture capital model. They are very few research done on the topic of musharakah venture capital but none of those research focus on commercialization of research findings. Since they are scarce available material on the topic, thus this study aims to contribute to the existing literature with the scope of musharakah venture capital in R&D commercialization settings.

2.0 Literature Review

2.1 Innovation, Commercialization and the Entrepreneurial Roles

2.1.1 Research and innovation as an economic catalyst for Malaysia

Research and innovations have been identified as the key important factors in developing Malaysia’s economy and thus, the Ministry of Higher Education (MOHE) has formulated a strong foundation for building the country’s capacity for knowledge and innovation by undertaking concerted efforts to achieve National Higher Education Strategic Plan (NHESP) by the year 2020. According to MOHE, The NHESP identified seven core thrusts areas to improve the overall quality of the national higher education. The third core thrust are focuses on enhancing research and innovation at Institutions of Higher Education which would accelerate progress towards a knowledge-based economy and enhance international competitiveness. To achieve this, Malaysia needs to consolidate research activities and strengthen capabilities within the Institution of Higher Education in the country. In this regard, Malaysia is committed to ensuring that research and development and commercialisation (R&D&C) be part of the national agenda [4] .

The Minister of Higher Education elaborating on this commented further;

"The objectives of R&D commercialisation are to coordinate commercialisation activities of all public universities and also to review commercialisation and intellectual property policies among Higher Education Institutions. It is hope that by the year 2020, 10% of the R&D products would be able to be commercialised adequately."

Malaysia economic development is no longer based on capital investment. To achieve a sustainable and inclusive economic growth, the innovation and creativity should be catalyst where knowledge-based economy heavily depends on research and development activities. It is hoped that the research done by the universities can be enhanced by new approaches, including collaboration, especially involving the research that has value to the community and meets the needs of the industry. Therefore, it is a necessity for the university to have collaboration with the industries to commercialise their R&D products. It will helps accelerate technology transfer and provide good training not only for the universities but most importantly for the researchers themselves.

2.1.2 Bringing innovations to market: the entrepreneurial tasks

Research and innovation is meaningless if it can’t benefit the mass. Thus, bringing innovations to market is one of the significant task of the entrepreneurs. Entrepreneur can be defined as a person who starts or organizes a commercial enterprise or person who works under contract as an intermediary in the business. According to Graham (2002), the entrepreneurial characteristics has been identified include innovation, with the entrepreneur being recognize as the agent for change, the willingness to take risks and the ability to make confident and judgmental decisions. In short, the entrepreneur is a person who involve in business activity by setting up a company or enterprise in a certain commercial area such as manufacturing, services sector, food industries and construction sector.

An economist, Schumpeter (1928) saw innovation as fundamental to the entrepreneurial process of wealth creation while Drucker (1985) proposed that innovation is the central task for the entrepreneur-manager. Researchers may come up with innovative product or technology but there will be no economic benefit if it can’t enter the market. Thus the relationship between entrepreneurs and researchers are vital for the success of the innovations so that the value could be deliver to the consumers.

2.1.3 Different dimensions of entrepreneurship

William Gartner (1990) undertook a detailed investigation of this matter. He surveyed academics, business leaders and politicians, asking what they felt was a good definition of entrepreneurship. From the responses he summarised 90 different attributes associated with the entrepreneur. These were not just variations on a theme. Many pairs of definitions shared no common attributes at all.

As well as managerial phenomenon, entrepreneurship has economic and social dimensions. The entrepreneur is an individual who lives and functions within a social setting. Entrepreneurs are not characterised by every action they take, but by a particular set of actions aimed at the creation of new wealth with their ventures. Wealth creation is a general managerial activity. Entrepreneurship is characterised by a particular approach to wealth creation. Recognising this gives us three directions from which we can develop an understanding of it. The entrepreneur can be considered as:

A manager undertaking an activity – i.e. in terms of the particular tasks they perform and the way they undertake them;

An agent of economic change – i.e. in terms of the effects they have on economic systems and the changes they drive; and as

An individual – i.e. in terms of their psychology, personality and personal characteristics.

Each of these three aspects is reflected in the variety of definitions offered for entrepreneurship. The function of each perspective is not merely to characterise entrepreneurs but also to distinguish them from other types of people involved in the generation of wealth such as an investors and ordinary managers.

Categorisation based on the concept of 'push' / 'pull' analysis has gained acceptance by the research community and is widely circulated in the literature (Dean, Meyer, & DeCastro, 1993; Granger et al., 1995). Central to the conventional economic theory is the theme that individuals start their own businesses based on an affirmative choice and attracted by the opportunity or the 'pull' of perceived profit (Storey, 1982). Unemployment or the threat of it and career dissatisfaction (Brockhaus & Dixon, 1986) are considered ‘push factors’ since they tend to push individuals towards self-employment as the best or the only available alternative to their current situation.

2.1.4 Islamic view on entrepreneurship

In Islamic entrepreneurship, the entrepreneur must possess a different standard of qualities with other types of entrepreneur. Muslim entrepreneur must first to have faith in the oneness of Allah, that there is nothing worthy of worship except Allah, the Creator and Sustainer of the universe (Muhamad Nejatullah Siddiqi, 1989). This tawheedic approach is the ultimate concept of entrepreneur in Islam.

Muslim entrepreneur must also believe that any asset from the business is a God’s ultimate ownership (Wahbah al-Zuhailliyy, 1989). There is no disagreement among the Muslims scholars in the belief that ownership of property belongs to God as it is explicitly stated in Surah al-Baqarah verse 255 where Allah says:

"Unto Allah (belongeth) whatsoever is in heavens and whatsoever is in earth".

According to Sohrab Behdad (1992);

"God’s ultimate ownership is the source of the ambiguity in property rights in Islam. It’s also implies that His ownership supersedes the right of the individual to property. Thus, a state representing the will of God from Islamic state perspective and may impose limits on individual property rights. The restrictiveness of these limits will depend upon the extent of interference of individual property rights with the realization of God’s will in the society of Muslims".

The concept of entrepreneurship in Islam also bases on co-operation, generosity and benevolence. That is why Islam really encourages ‘uqud al-tabarruat or unilateral contract such as loan (al-Qard) in order to promote cooperation and inculcate sense of brotherhood amongst Muslims. At the same time Islam extremely prohibited monopoly, exploitation, fraud or usurious transactions. In other word, every entrepreneur should always preserve the good deeds and avoiding the evil such as being honest, fair, and accurate in every transaction.

All the above principles are expected not only to have significant impact on the business ethics of Muslim entrepreneur, but also to be a habit and customary practice of each person that involve in commercial activities. It is strongly urged that every Muslim entrepreneur to observe all the above principles in doing business in order to promote a good governance of Islamic entrepreneurship.

2.1.5 The technology-based entrepreneurs

Technology-based entrepreneurs are especially important in modern business as it is they who are taking advantage of new scientific developments especially in the areas of information technology, biotechnology, engineering science and offering their benefits to the wider world. Investors are attracted by the high growth potential of their ventures. Jones-Evans (1995) offers a fourfold categorization of such technology-based entrepreneurs based on their technical and commercial experience prior to making the move to entrepreneurship:

The ‘research’ technical entrepreneur: Those whose incubation has been in a research environment. Two sub-types are suggested: ‘Pure research’ entrepreneurs who have been based in academic research environments and who have not had significant commercial experience and ‘research producer’ entrepreneurs who while working in an academic or industrial research environment have had exposure to commercial decision making.

The ‘producer’ technical entrepreneur: Those whose incubation has included an exposure to decision-making in a commercial setting along with experience in technological development.

The ‘user’ technical entrepreneur. An individual whose main experience has been commercially based but has involved contact with, and the development of knowledge about, a technical development. This may be because they have been employed in its marketing or sales, or perhaps in procuring that technology for a business.

The ‘opportunist’ technical entrepreneur. One who has no previous exposure to a technology but has seen a commercial opportunity in relation to it and has pursued that with a new venture. They may call upon a general technical knowledge base and are keen to develop an understanding of the new technology and what it offers.

2.2 Venture Capital and Private Equity

2.2.1 Overview of venture capital and private equity

According to Zaid Hamzah (2011), the private equity (PE) and venture capital (VC) business is about buying companies or taking equity stakes in ventures, improving their performance and selling it off for a profit. PE and VC investment are investments made primarily with a view to exiting with a higher premium. VC is a sub-set of PE and usually refers to investment in riskier start-up ventures while private equity deals tend to involve more mature investee companies. The ultimate purpose of PE and VC deals is to invest in companies in which the investors see as commercially promising and then to exit from the investment after a number of years to secure their returns on investment (typically describes as "harvesting").

2.2.2 Common shari’ah-based structures for Islamic PE and VC

According to Ahmad Lutfi (2011), in Islam, money is not viewed as a commodity and cannot and should not be traded for profit. Money stores value and is simply a medium of exchange. Money must therefore be invested in projects and ventures for the generation of activity which benefits mankind and in the process, earns profit.

Mudarabah (profit sharing) is one of the typical forms of Islamic PE / VC. It is basically a contract made between two parties ti finance a business ventures. The parties are rabb al-mal who solely provides the capital and Mudarib (entrepreneur) who solely manages the project. This is akin to a conventional PE and VC, where there exist a relationship between the capital provider and the entrepreneur. If the venture is profitable, the profit will be distributed based in a pre-agreed ratio. In the event of a business loss, it should be borne solely by the capital provider, to the extent of the capital contributiuon while the entrepreneur will lose his time and effort. The key to a mudarabah structure is the fact that the entrepreneur cannot be placed at risk to bear losses. Unless proven negligent.

Musharakah is a parnertship between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind. Profits are shared at a pre-agreed ratio while in the event of a loss, the loss shall be shared on the basis of capital contribution.

Wakalah is acontract where a party (principal) authorizes the other party or parties (agent) to act on his behalf, based on the agreed terms and conditions. Pursuant to the wakalah contract, it confers the power and rights to the agent to act on behalf of the principal as long as the principal is alive.

2.2.3 Nature of venture capital and private equity

PE is a form of medium to long term investment provided in return for an equity stake in potentially high growth companies that are usually not listed on a stock exchange [5] . Having an equity stake means having a share in a company. VC is a sub-set of PE. From the American terminology the term "venture capital" refers to investments in early growth stage and expanding companies while in Europe, the terminology refers to all stages, i.e. synonymous with "private equity" [6] .

VC refers to PE capital at an early stage [7] . VC is a sub-set of the PE asset class which includes leveraged buy-out, management buy outs, management buy-in, bridge and mezzanine investments. After stocks, cash, fixed income and property, PE is the fifth asset class. Intangible assets like intellectual property rights are now generally regarded as the sixth asset class. Asset allocation is a critical component in portfolio performance. For all investors, PE is a sensible choice to include as part of a modern portfolio (Lodge, 2004).

2.2.4 Differences between venture capital and private equity

Both PE and VC make money from investments rather than advisory fees. However, there are some differences in terms of their focus and approach [8] .

Investee Company Types: PE firms buy companies across all industries, whereas VC are focused on companies developing new technology (example biotechnology or green technology) or creating new untested business model.

Percentage of Interest Acquired: PE firms tend to acquire 100% of a company – for example in a typical leveraged buyout. VCs however usually acquire a minority stake typically less than 50%.

Investment Size: PE firms tend to make large investments while VC investments are much smaller for early stage enterprises.

Stage of Growth: PE firms usually buy mature companies whereas VC invest mostly in early-stage companies with no or little revenues.

Sales Growth

Late Stage-Pre-IPO/Management Buyouts/Buy-Ins/Leveraged Buyouts

Turnaround/Distressed situation

Funds:

Expansion Stage

PE

GR

VC

Time

Early stage/start up

Seed stage

Figure 1: Venture Capital & Private Equity in a Business Life Cycle. Source : Darawati Hussain (2008).

2.3 Intellectual property-based investments

2.3.1 Intangible assets and the connected economy

In agrarian times, wealth meant land. In industrial times, it meant factories. Recently, information replaced industrial capacity as the primary means of creating wealth, and now the economic foundation is shifting yet again to the connected economy (Davis & Meyer, 2000).

The changes are grounded in the fundamentals of the universe which are time, space and mass. We experience them in everyday life as speed, connectivity and intangibles. Speed shows itself in drastically shortened product lifetimes, customer response cycles, management decision making and the end of equilibrium as a management mind-set. Connectivity, hooking up everybody and everything electronically, has made distance space irrelevant, and put any useful information where it is needed, instantly. Intangibles, such as software, information, services, and most recently, human capital have replaced hard goods as the most valuable and fastest growing part of the economy.

The shift to intangibles happened in three waves. In the first wave, from the 1950s onto the 1970s, service businesses grew faster than product-based ones. Services were 31% of the United States national output in 1950, increased to 42% by 1970 and 46% by 1980, and reached 55% by 1998.

In the second wave, from the 1970s through the 1990a, the core of today’s US $U1.5 trillion worldwide computer and communication industries has shifted from hardware to software and information services (Grose , 1999).

The third and current wave of intangible value, the rise of human and intellectual capital as the most highly valued resource of the late information age, began in the 1990s and will continue for the next few decades.

These three principles define the connected economy:

Speed: constant change is healthier than stability

Connectivity: Open systems thrive, closed ones whither.

Intangibles: The virtual trumps the physical.

2.3.2 Islamic intellectual property-based investment

Over the decades, traditionally PE and VC investments have been made in sectors dealing primarily with tangible assets such as real estate or businesses dealing with physical asset-based business. Islamic PE and VC since has evolved and as observed by Norton Rose (2010), a leading international English law firm [9] ;

"As the Islamic finance industry matures, other asset classes are being financed by shari’ah- compliant structures: company shares, carbon credits, electricity, intellectual property rights and mobile telephony airtime are just a few examples. The boundaries between tangible and intangible assets are becoming blurred, as scholars accept that certain classes on intangible assets do have a usefulness that can and should be recognized by shari’ah."

According to Zaid Hamzah (2011), as demonstrated in Figure 2 below, IPR is a sub-category of intellectual capital which is widely regarded today as a new factor of production supplementing human capital, land and equipment as the primary factor of production in the production economy. Today, innovation and intellectual capital are driving the creation of the intellectual capital economy.

Intellectual Capital

Human Capital

Intellectual Assets

Experience

Insights

Know-how

Skills

Creativity

Innovation

Management ability

Intellectual Property Rights

Copyrights

Patent

Trademark

Design

Trade Secret

Programs, Inventions, Methodologies, Processes, Systems Database, Documents, Designs

Figure 2: Category and Sub –category of Intellectual Property. Source: Zaid Hamzah (2011).

The World Intellectual Property Organization (WIPO) defines intellectual property (IP) rights as creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. IP is divided into two categories [10] :

1. Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and

2. Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Rights related to copyright includes those of performing artists in their performances, procedures of phonograms in their recordings, and those of broadcasters in their radio and television programs.

2.3.3 Intellectual property rights (IPR) from the Islamic perspective

Islam recognizes IPR as property rights which can be owned by individuals or body corporate such as companies. The Islamic Fiqh Academy on its fifth meeting held in Kuwait from 10th to 15th December 1998 have reviewed the papers presented by the members and expert concerning "incorporeal rights" and came up with the following resolves [11] :

1. Business name, corporate name, trade mark, literary production, invention or discovery, are rights belonging to their holders and have, in contemporary times, financial value which can be traded. These rights are recognized by the shari’ah and should not be infringed.

2. It is permitted to sell a business name, corporate name, trade mark for a price in the absence of any fraud, swindling or forgery, since it has become a financial right.

3. Copyrights and patent rights are protected by shari’ah. Their holders are entitled to freely dispose of them. These rights should not be violated.

2.3.4 IP law in Malaysia

Any matters in relation to IP is governed under the purview of the Intellectual Property Corporation of Malaysia (MyIPO). IP Law was regulated in accordance of the introduction of National Intellectual Property Policy (NIPP). The main purpose of the NIPP is to harness IP as a new engine of growth for the enhancement of economics and social prosperity.

The policy is also required to support one of the objectives of the Multimedia Super Corridor Bill of Guarantees ‘to become a regional leader in IP protection and cyber laws’, National Biotechnology Policy and National Convention on Biodiversity Policy and other policies that are related to IP. Developing an efficient IP system will entail the following strategies [12] :

Strengthening the IP administration of MyIPO to meet the yearly increase in registration applications and needs of clients as well as to provide simple application procedures and speedy registration, clear registration guidelines, quality public search facilities and efficient information dissemination system.

Constant updating of laws and regulations to keep abreast with international development, new challenges and new issues.

Capacity building to create a large pool of human resource proficient in registration and enforcement of IP.

Strengthening of the Government’s enforcement agencies that enforce infringement of IPR under the Trade Descriptions Act 1972, Optical Disc Act 2000, Trade Marks Act 1976, Patents Act 1983, Copyright Act 1987, Industrial Designs Act 1996, Layout Designs of Integrated Circuits Act 2000 and Geographical Indications Act 2000.

2.4 Overview on Musharakah

2.4.1 The musharakah contract

The word musharakah in Arabic is derived from the word sharaka or to share. This is a partnership between two or more parties to finance a business venture where all parties contribute capital either in the form of cash or in kind. Profits are shared at a pre-agreed ratio. In the event of a loss, such losses shall be shared on the basis of their capital contribution. The connotation of musharakah terminology is a little limited than the term shirkah more commonly used in the Islamic jurisprudence. There are two kinds of shirkah. Acording ot AAOIFI shirkah al-aqd (contractual partnership) means an agreement between two or more parties to combine their assets, labour or liabilities for the purpose of making profit while shirkah al-milk means joint ownership of two or more persons in a particular property. (Ahcene Lahsasna, 2010). Muhammad Taqi Usmani, (2002) further explained that shirkah al-aqd can be divided into three types;

Shirkah al-amwal – if the subject matter is in form of money, where all the partners invest some capital into the commercial enterprise.

Shirkah al-amal – if the subject matter is in the form of labour, where all the partners jointly undertake to render some services to the customers and all the income generated will be distributed among them according to the agreed ratio irrespective of the size of the work each partner has actually done.

Shirkah al-wujuh – if the subject matter is reputation or creditworthiness, whereby the parties purchase commodities on a deferred price and sell them on the spot. The profit earned will be distributed among them on an agreed ratio.

Edib Smolo & M. Kabir Hassan (2011), pointed out that these principles was first introduced by Quraishi in his work Islam and the Theory of Interest. However, it was formally discussed by Ahmad in Economics of Islam, in 1947 (Kahf and Khan, 1992)

Shirkah

Shirkah al-aqd

Shirkah al-milk

Shirkah al-amwal

(Partnership in trade)

Shirkah al-amal

(Partnership in service)

Shirkah al-wujuh

(Partnership in goodwill)

Optional

Compulsory

Figure 3: The category of shirkah. Source: An Introduction to Islamic Finance. Muhammad Taqi Usmani, (2002).

2.4.2 Legality of musharakah

The practice of musharakah has a legal basis based on the Qur’an and the Sunnah. There are several verses usually quoted in support of musharakah, one of them is the verse that encourages mutual assistance or joint effort for good purposes:

"Help one another in righteousness and piety". (Al-Maidah:2).

Another Qur’anic verse, Allah says:

"Truly many are partners in business who wrong each other: not so do those who believe and work deed of righteousness and how few are they?" (Al-Sad: 24).

In the Sunnah, the Prophet (pbuh) said that Allah s.w.t. said in the form of Hadith Qudsi:

"I am the third in the partners as long as there is no defector. If one of the partners does betray the other, I cease to be the partner to them".

This Hadith indicates that Allah will safeguard the partners and the trade. This Hadith encourages the Muslim to enter into partnerships, provided that each of the parties is honest in respect of the rights of the other.

2.4.3 Types of musharakah

Musharakah can be divided into two types: inan (unequal-shares partnership) and mufawada (equal-shares partnership). Inan contract simply means that two or more people commit themselves to pay a specified share into a capital to be used in trade and the profit would be divided shared between them according to a specified ratio agreed upon by them. It does not require equality in investment amount. Equality of personal status or distribution of profit and liabilities among the partners is not a requirement. Each one of the partners is considered as an agent or representative of the other in acting on matters concerning the capital of the company and trade transactions. Each partner may only transact with the partnership capital according to the terms of the partnership agreement and each one of them must act to serve the best interest of the company.

In an inan partnership, the partners act as an agent in respect of the other partner’s rights but not as sureties, which means that each of the partners will not guarantee the liabilities of the other partners. The contract of this company is not binding, which means that it is within the right of any one of the partners to cancel the contract whenever he so wishes.

Mufawada is a type of contract under musharakah, where the contracting parties have equal share the capital, profit and freedom of disposal. Each partner in this type of contract enjoys full and equal authority to transact with the partnership capital.

According to Moghul (2009), profit and loss allocation and distribution rules are quite similar to those of mudarabah. It is worth noting that many Muslim jurists require profits to be shared pro rata in accordance with capital contributions through many do not. A third variation with respect to profit sharing is the requirement that some initial (reasonable) amount of the profit be shared pro rata in accordance with capital contributions; the remaining balance may then be distributed on the manner agreed upon by the partners of shareholders. A fixed or guaranteed return is strictly prohibited.

2.4.4 The nature of injected capital

The instrument of musharakah may be used where finances are required for the working capital of the business venture. The capital may be evaluated with mutual consent. Apart from cash, non-liquid assets can also form part of the capital on the basis of evaluation. The shari’ah scholars according to their school of thought have different views on the opinion that the capital should be in monetary form, but not on commodities. Muhammad Taqi Usmani (2002) has compiled these different views and their judgement or rulings as follows:

Imam Malik argued that, partners can contribute capital in a form of money since it is not a condition for the validity of a musharakah, but it may also be permissible to invest in kind with condition that, the partners' share is subject to market price of that commodity prevalent at the date of the contract.

Imam Abu Hanifah and Imam Ahmad bin Hanbal are of the view that no contribution in kind is acceptable in a musharakah. Their arguments are base on the following two reasons:

(i) the commodities of each partner are always distinguishable from the commodities of the other. Commodities are naturally not the same, even if the same in form but differ in qualities and values, hence musharakah is invalid if the properties in the deal are distinguished from one another.

(ii) the share-capital redistribution cannot be possible, since commodities are subject to price fluctuations. But he agrees on commodities as capital if the commodities are dhawat-ul-amthal. A dhawat-ul-amthal is a type of commodity, which if destroyed can be compensated by similar commodity in quality and quantity like rice.

Imam al-Shafi’i is also of the same opinion that if the commodity is dhawat-ul-amthal then is acceptable on the ground that it can be mix with other commodities of the same type, but he disagreed on dhawat-ul-qeemah, commodities, which cannot be compensated by the similar commodities like cattle.

To conclude here that, the share capital can be in form of money or commodities, the market value of the commodities shall determine the share of the partner in the venture capital.

3.0 Research Methodology

The research method chosen for this research is the qualitative method. The qualitative research method is another type of research that is different from that of its quantitative counterpart in terms of the area of study, the type of data obtained and its analysis. The qualitative research differs from quantitative research in the following ways: [13] 

The data is usually gathered using less structured research instruments.

The findings are more in-depth since they make greater use of open-ended questions.

The results provide much more detail on behaviour, attitudes and motivation.

The research is more intensive and more flexible, allowing the researcher to probe since the researcher has greater latitude to do so.

The results are based on smaller sample sizes and are often not representative of the population.

The research can usually not be replicated or repeated, given it low reliability.

Silverman (2004) mentioned that in choosing a method, it depends on what we are trying to find out. He listed several questions where qualitative research is concern for a specific research:

What exactly am I trying to find out? Different questions require different methods to answer them.

What kind of focus on my topic do I want to achieve?

How have other researches dealt with this topic? To what extend do I wish to align my project with this literature?

What practical considerations should sway my choice? For instance, how long might my study take and do I have the resources to study it this way? Can I get access to the single case I want to study in depth? Are quantitative samples and data readily available?

Will we learn more about this topic using quantitative or qualitative methods? What will be the knowledge pay off of each method?

Based on these questions, this study was deem appropriate to use a qualitative approach. The information was gathered through primary sources and secondary sources. In qualitative methods, exploration becomes particular and useful when the researcher is lack of clear idea of the problems that they will face during the research. This research was written by gathering related information and data from available literatures such as books, articles, seminar papers, journals and information from the internet.