The feasibility study of Mushārakah and Muḍārabah in franchise industry

The application of mushārakah and muḍārabah partnership contracts is well-established in contemporary Islamic financial sectors, such as banking and capital markets. However, their utilization in real business sectors, such as the franchise industry, remains limited. This qualitative exploratory study aims to examine the feasibility of applying mushārakah and muḍārabah contracts in the franchise industry, proposing them as alternative Islamic contracts. Using a case study method, data was collected through semi-structured interviews with five experts in mu‘āmalah contracts and franchise industry, and six franchisors. Thematic analysis was employed for data analysis. Findings indicate that franchises based on mushārakah and muḍārabah operate on a profit and loss sharing basis, rather than imposing franchise fees and royalties. Trust and sincerity are crucial in partner selection for both contracts. Trademarks, brands, goodwill, and expertise are valued as intangible assets. The application of mushārakah, particularly through mushārakah al-‘inān, is more comprehensive compared to muḍārabah. Mushārakah offers flexibility for both parties to contribute business capital in various forms, including financial capital and expertise, leading to joint risk-bearing responsibilities. On the other hand, muḍārabah involves a Sāhib al-māl (capital provider) and a muḍārib (entrepreneur), who contributes energy and skills. This partnership allows franchisors to act as both entrepreneurs and capital providers, extending the same flexibility to franchisees. Such a relationship accommodates the specific circumstances of both franchisors and franchisees, offering flexibility for business expansion and growth. This study develops a conceptual framework to guide policymakers, Muslim franchisors, and franchisees regarding the feasibility of mushārakah and muḍārabah in Malaysia’s franchise industry. However, one limitation of this study is that it only involved experts and franchisors, without considering the perspectives of franchisees. Future research should include franchisees to provide a more comprehensive understanding of the feasibility of mushārakah and muḍārabah contracts in the franchise industry.