Islamic Mode of Finances

MUSHARAKAH

Islamic Mode of Finance

1. Trade based a. Musawamah b. Murabaha c. Ijarah d. Bai Salam e. Bai Istisna 2. Sharing Based (Partnership) a. Musharakah b. Diminishing Musharakah c. Mudarabah 3. Debt based - Qard

MUSHARIKA
Derives from Shirkah Literal Meaning being a partner

It is used in the same context as the term Shirk meaning partner to Allah
Under Islamic Jurisprudence, Musharaka means a joint enterprise formed for conducting some business in which all partners share the profit according to the decided ratio while the loss is shared according to the ratio of the contribution.

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Interest determines a fixed rate of return while Return in Musharakah is based on actual profit & loss Interest-bearing transaction Financier cannot suffer loss Musharakah transaction - Financier can suffer loss The partners share capital, management, profit and risk and every partner is trustee, guarantor, and agent on behalf of the other partner.

SHIRKAT
Modaraba (Where one partner invests, and the other manages) Musharka (Where all partners invests but only some of them work eg. Banks where depositors and shareholders invest but only shareholders work).

Conditional
(Where the Investor specifies the business to the manager eg which, where etc.)

Unconditional (Where the Investor gives full authority to the manager in all aspects of business.)

Musharaka
Shirkat-ul-Milk
(Joint ownership of two or more people in a property.)

Shirkat-ul-Aqd
(Joint Enterprise by contract) Where2 or more people become partners by entering into a contract.

Ghair Ikhtiari (Compulsory)

Optional: When parties opt

to make a partnership. For e.g

(Where 2 or more people become partners as an automatic consequence eg inheritors after the death of a family member)

See separate chart for Shirkat-ul-Aqd

SHIRKAT-UL-AQD

Shirkat-ul-Amwal (Parnership in capital) Where all partners invest capital into a commercial enterprise and share in profit.

Shirkat-ul-Aamal

Shirkat-ul-Wujooh

(Partnership in Services) (Partnership in goodwill) Where all partners jointly Where partners have no investment undertake to render some services at all. All they do is that they for their customers and the fee purchase the commodities on a charged from them is distributed deferred price and sell them at spot. among them according to an agreed The profit so earned is distributed ratio. between them at an agreed ratio.

Basic rules of Musharakah

MANAGEMENT OF MUSHARAKAH:

All partners must have the contractual capacity Each partner has a right to take part in Musharakah management However, the partners may appoint a Managing Partner by mutual consent. In this case the other partners will become sleeping partners. And will only be entitled to share in profit in proportion to their investment. All active partners are treated as agent of others in all matters of business.

Basic rules of capital in Musharakah

The capital must be: Quantified (Maloom): How much Specified: Specified currency Not necessary be merged Not necessary be in liquid form

Distribution of profit
The ratio of profit distribution should be agreed at the time of execution of contract otherwise contract is void. The ratio should be determined on basis of actual profit earned by the enterprise. Not as a percentage of partners investment & Not in lump sum amount Active partners profit share can be higher than his / her proportion of investment It is not permitted to start the allocation of profit between partners unless the operating costs, expenses and taxes are deducted.

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Sleeping partners share of profit cannot be more than his share of capital in the business.

SHARING OF LOSS
Loss to be shared exactly in ratio of investment while Profit is based on agreement of the parties, but loss is always subject to the ratio of investment

Termination of Musharakah
Musharakah will be terminated in following conditions: Purpose of forming musharakah is achieved. For e.g musharakah was formed for a certain project and the project stands completed Every partner can terminate musharakah by giving a notice Musharakah stands terminated if any partner dies or becomes insane

 Each partner has the right to terminate the Musharakah at any time after giving prior notice to other partners How will the assets be distributed in such case? If the assets are in liquid form, They will be distributed in proportion of investment If the assets are non-liquid, there are two scenarios a) The assets may be liquidated, and the proceeds to be distributed b) The assets may be distributed in their existing form after valuation

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If the assets cannot be distributed in their existing form e.g. Machinery; they will be liquidated and the proceeds to be distributed as per ratio of investment If partner A wants termination and partner B wants continuation, B can continue by purchasing the shares of A. A condition in the agreement can be included which require consent of all partners for the termination of Musharakah

Dispute resolution
Provision of review committee can be added to the agreement which will resolve the difference arising between the partners.

USES of Musharakah
Asset side Financing: LC with margin SME set up financing Machinery financing Project Financing Import financing

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Liability side financing: Deposits giving profit on musharakah basis Islamic musharakah bonds