MusharkaMusharka((Equity ParticipationEquity Participation) )

oror

Venture FinancingVenture Financing

MusharkaMusharka((Equity ParticipationEquity Participation) )

oror

Venture FinancingVenture Financing

Islamic Financial ProductIslamic Financial Product

IntroductionIntroduction Musharka or Shirkah can be Musharka or Shirkah can be

defined as a form of partnership defined as a form of partnership where two or more persons where two or more persons combine either their capital or combine either their capital or labor together to share the profits labor together to share the profits & enjoying similar rights and & enjoying similar rights and liabilities. liabilities.

A contract between two or more A contract between two or more persons who launch a business or persons who launch a business or financial enterprise to make profit. financial enterprise to make profit.

Condition of MusharkaCondition of Musharka

Musharka is a technique of Musharka is a technique of financing used as a partnership. financing used as a partnership.

Two or more parties provide Two or more parties provide finance for a project. finance for a project.

All partners are entitled to a All partners are entitled to a share in the profits resulting share in the profits resulting from the project in a ratio which from the project in a ratio which is mutually agreed upon.is mutually agreed upon.

In case of loss it is shared In case of loss it is shared exactly in the proportion of exactly in the proportion of capital.capital.

All partners have a right to All partners have a right to participate in managing the participate in managing the project. project.

Any one can waive the right Any one can waive the right of participation in favor of of participation in favor of partner or partners. partner or partners.

Historical Background Historical Background MusharkaMusharka

From the beginning of human society From the beginning of human society methods to meet day to day needs methods to meet day to day needs have been changing with the change have been changing with the change of social, economic, scientific, of social, economic, scientific, cultural and political circumstances.cultural and political circumstances.

Especially habits, fashions and the Especially habits, fashions and the standard of living.standard of living.

These methods regulate the These methods regulate the commercial activities and vary from commercial activities and vary from place to place and time to time.place to place and time to time.

The Arab society at the time of the The Arab society at the time of the rise of Islam had very simple rise of Islam had very simple financing methods and forms of financing methods and forms of business peculiar to that society business peculiar to that society

Birth of Islam saw Musharka Birth of Islam saw Musharka practice in Arabia in commercial practice in Arabia in commercial activities.activities.

Islam endorse and Prophet May Islam endorse and Prophet May Peace be upon Him perform Peace be upon Him perform business on the basis of Musharkabusiness on the basis of Musharka..

After Hijra Muhajireen and After Hijra Muhajireen and Ansar were declared by Prophet Ansar were declared by Prophet May Peace be upon Him to be May Peace be upon Him to be brothers. brothers.

Subsequently they joined as Subsequently they joined as partners on Musharka, Muzara partners on Musharka, Muzara and Mussaqa form trade and and Mussaqa form trade and commerce. commerce.

Nature of transactions in the Nature of transactions in the different forms were identical.different forms were identical.

These forms were so developed These forms were so developed that they became independent that they became independent institutions.institutions.

Jurists formed detailed rules Jurists formed detailed rules about the form. about the form.

There is a consensus of opinion There is a consensus of opinion among the jurists of all schools- among the jurists of all schools- of thought that Musharka is a of thought that Musharka is a valid and legitimate contract in valid and legitimate contract in Islam. Islam.

The jurists, however differ over The jurists, however differ over its form conditions and other its form conditions and other details details

Two main forms of Two main forms of MusharkaMusharka

Permanent MusharkaPermanent Musharka In this form the parties of Musharka In this form the parties of Musharka

participates in the equity of a project participates in the equity of a project or transaction and receives a share or transaction and receives a share of profit on a pro rata basis.of profit on a pro rata basis.

The period of contract is not The period of contract is not specified. specified.

It can continue so long as the will of It can continue so long as the will of the parties.the parties.

This technique suits for long terms This technique suits for long terms projects as funds and development projects as funds and development are committed and protracted. are committed and protracted.

Diminishing Musharka – Diminishing Musharka – It allows equity participation on a It allows equity participation on a

pro-rata basispro-rata basis System by which equity of parties System by which equity of parties

keeps on reducing ultimately the keeps on reducing ultimately the ownership of the asset on any one or ownership of the asset on any one or more participants is transfers.more participants is transfers.

Partners gets dividend on their Partners gets dividend on their equity and if any of the partner sell equity and if any of the partner sell or buy other partner some of its or buy other partner some of its equity, it is allowed to do so.equity, it is allowed to do so.

Equity held by partner progressively Equity held by partner progressively reduced and at a certain time equity reduced and at a certain time equity held by any partner reach to ZEROheld by any partner reach to ZERO..

Disposal of total equity an end of Disposal of total equity an end of MusharkaMusharka

Musharka form of financing is being Musharka form of financing is being used by Islamic banks to finance used by Islamic banks to finance Project Financing and Working Project Financing and Working Capital. Capital.

Types of MusharkaTypes of Musharka Shirkah -Al-MilkShirkah -Al-Milk (non-contractual) (non-contractual) It involve co-ownership and form when two It involve co-ownership and form when two

or more persons get joint-ownership of or more persons get joint-ownership of some asset without a formal partnership some asset without a formal partnership

agreement. Exampleagreement. Example

Two persons receiving an inheritance or Two persons receiving an inheritance or a gift of property which mayor may not a gift of property which mayor may not be divisible.be divisible.

Partners have to share property or its Partners have to share property or its income in accordance with their share income in accordance with their share until they decide to divide. until they decide to divide.

If the property is divisible and partners If the property is divisible and partners still decide to stick together, It is Shirkah still decide to stick together, It is Shirkah al-Milk al-Milk Ikhtiyariyyah (Ikhtiyariyyah (voluntary).voluntary).

If it is indivisible and they are forced to If it is indivisible and they are forced to stay together it is characterized asstay together it is characterized as JabriyyahJabriyyah (involuntary). (involuntary).

It is a proper partnership as the parties It is a proper partnership as the parties concerned willingly entered into a concerned willingly entered into a contractual agreement for joint contractual agreement for joint investment and the sharing of profits and investment and the sharing of profits and risksrisks

Shirkah al-Uqood Shirkah al-Uqood (contractual partnership)(contractual partnership). . The agreement need not necessarily The agreement need not necessarily

be formal and written, it could be be formal and written, it could be informal and oral.informal and oral.

Just as in Modaraba, the profits can Just as in Modaraba, the profits can be shared in any equitably agreed be shared in any equitably agreed proportion. proportion.

Losses must, however, be shared in Losses must, however, be shared in proportion to the capital contribution. proportion to the capital contribution.

Type of Al-UqoodType of Al-Uqood

In Fiqh Shirkah al-Uqood divided In Fiqh Shirkah al-Uqood divided into four kindsinto four kinds: :

Al-MufawadahAl-Mufawadah (full authority & obligation) (full authority & obligation) Al-InanAl-Inan (restricted authority & obligation) (restricted authority & obligation) Al-AbdanAl-Abdan (labor, skill and management) (labor, skill and management) Al-WujuhAl-Wujuh (goodwill, credit-worthiness and (goodwill, credit-worthiness and

MufawadahMufawadah In Mufawadah partners are In Mufawadah partners are

adults, adults, equal in their capital equal in their capital

contribution,contribution, their ability to undertake their ability to undertake

responsibility and their share of responsibility and their share of profits and losses. profits and losses.

They have full authority to act on They have full authority to act on behalf of the others behalf of the others

jointly and severally jointly and severally responsible for the liabilities of responsible for the liabilities of their partnership business, their partnership business, provided that such liabilities provided that such liabilities have been incurred in the have been incurred in the ordinary course of business. ordinary course of business.

Each partner can act as an Each partner can act as an agent (Wakil) for the agent (Wakil) for the partnership business and stand partnership business and stand as surety or guarantor (Kafil) as surety or guarantor (Kafil) for the other partnersfor the other partners

InanInan Inan involve all partners need not be adults Inan involve all partners need not be adults

or have an equal share in the capital.or have an equal share in the capital. They are not equally responsible for the They are not equally responsible for the

management of the business. management of the business. Their share in profits may be unequal, but Their share in profits may be unequal, but

this must be clearly specified in the this must be clearly specified in the partnership contract.partnership contract.

Their share in losses would be in Their share in losses would be in accordance with their capital accordance with their capital contributions.contributions.

Shirkah Al-Inan the partners act as agents Shirkah Al-Inan the partners act as agents but not as sureties for their colleagues. but not as sureties for their colleagues.

Shirkah Al-AbdanShirkah Al-Abdan

Shirkah al-AbdanShirkah al-Abdan is where the partners is where the partners contribute their skills and efforts to the contribute their skills and efforts to the management of the business without management of the business without contributing to the capital. contributing to the capital.

They use their expertise, experience and They use their expertise, experience and goodwill that give confidence and strength goodwill that give confidence and strength to the venture either on profit or wages..to the venture either on profit or wages..

Shirkah Al-WujuhShirkah Al-Wujuh

Partners use their goodwill, their credit-worthiness and Partners use their goodwill, their credit-worthiness and their contacts for promoting their business without their contacts for promoting their business without contributing to the capital.contributing to the capital.

Both these forms for partnership, where the partners Both these forms for partnership, where the partners do not contribute any capital, would remain confined do not contribute any capital, would remain confined essentially to small-scale businesses only. essentially to small-scale businesses only.

These are of course models. In practice, however, the These are of course models. In practice, however, the partners may contribute not only finance but also partners may contribute not only finance but also labor, management and skills, and credit and goodwill, labor, management and skills, and credit and goodwill, although not necessarily equally although not necessarily equally

Introduction & Back Introduction & Back groundground

Dilemma in this modern world for entrepreneur Dilemma in this modern world for entrepreneur is his capability to initiate his idea for a new is his capability to initiate his idea for a new business.business.

He look to raise equity, capital or financing to He look to raise equity, capital or financing to enter business venture.enter business venture.

Firstly loan need collaterals arrangements, Firstly loan need collaterals arrangements, keeping in mind the impossibility.keeping in mind the impossibility.

Secondly borrowing that is made for the Secondly borrowing that is made for the purpose is subject to the cost to be paid in purpose is subject to the cost to be paid in shape of interest ranges to 6% to 20% or more.shape of interest ranges to 6% to 20% or more.

Thirdly cost to be paid on loan has to be Thirdly cost to be paid on loan has to be determine on the volume of risk and success.determine on the volume of risk and success.

If interest rate is 6% but the venture has a 10% If interest rate is 6% but the venture has a 10% chance of failing within a year, the lender will chance of failing within a year, the lender will probably charge interest at a rate of 16%.probably charge interest at a rate of 16%.

High interest on compounding impose heavy High interest on compounding impose heavy costs on the venture from the start.costs on the venture from the start.

It increase the danger of failure and rise interest It increase the danger of failure and rise interest rate. If venture's prospects can not be predicted rate. If venture's prospects can not be predicted with confidence, it is difficult to calculate an with confidence, it is difficult to calculate an appropriate interest rate.appropriate interest rate.

Alternative for entrepreneur is admit a Alternative for entrepreneur is admit a partner to the business who is entitled to partner to the business who is entitled to receive a portion of profits from the receive a portion of profits from the venture in exchange for contributing venture in exchange for contributing capital. capital.

The partner's contribution and participation The partner's contribution and participation is pre determined. is pre determined.

There is no need to compute an interest There is no need to compute an interest rate and there are no fixed costs of debt.rate and there are no fixed costs of debt.

The partner will receive profits only if The partner will receive profits only if earned earned

Islamic PerspectiveIslamic Perspective Islam stress on the socio economic Islam stress on the socio economic

development that tie individuals with development that tie individuals with brotherhood and care like members brotherhood and care like members of one single family. of one single family.

This brotherhood is universal and This brotherhood is universal and not narrow-minded.not narrow-minded.

It is not tie by any geographical It is not tie by any geographical boundaries and take whole of boundaries and take whole of mankind group, tribe or race into mankind group, tribe or race into one relation and that is universal one relation and that is universal partners for better earth.partners for better earth.

The concept of brotherhood and equal treatment The concept of brotherhood and equal treatment in society and before the law is not meaningful in society and before the law is not meaningful unless accompanied by economic justice.unless accompanied by economic justice.

Receiving dues for individual who contribute to Receiving dues for individual who contribute to economic activity in society or to the social economic activity in society or to the social product without any kind of exploitation of one product without any kind of exploitation of one by another.by another.

The Prophet The Prophet May Peace Be UponMay Peace Be Upon HimHim warned: warned:

""Beware of injustice for injustice will be Beware of injustice for injustice will be equivalent to darkness on the Day of judgmentequivalent to darkness on the Day of judgment". ".

This warning is against injustice and exploitation This warning is against injustice and exploitation and to protect the rights of all individuals and to protect the rights of all individuals whether consumers, producers, distributors, whether consumers, producers, distributors, employers or employees with aim to promote employers or employees with aim to promote welfare and ultimate goal of Islam. welfare and ultimate goal of Islam.

Special significance is given to the Special significance is given to the relationship between the employer relationship between the employer and the employee which Islam places and the employee which Islam places in a proper setting and specifies in a proper setting and specifies norms for the mutual treatment of norms for the mutual treatment of both so as to establish justice both so as to establish justice between them.between them.

An employee is entitled to a "just" An employee is entitled to a "just" wage for his contribution to output wage for his contribution to output and it is unlawful for the employer to and it is unlawful for the employer to exploit his employee.exploit his employee.

In case is with trader and consumer In case is with trader and consumer the dealing fair and transparent. the dealing fair and transparent.

Modern Musharka and its Modern Musharka and its ConditionsConditions

The modern business concerns being run The modern business concerns being run on the basis of Musharkaon the basis of Musharka

Partnership: It is regulated by Partnership: It is regulated by Partnership: It is regulated by- Partnership: It is regulated by-

1.1. Partnership rules framed by the Partnership rules framed by the government, government,

2.2. Business practices prevailing in the Business practices prevailing in the business community. business community.

Limited CompanyLimited Company

This type of Musharka is This type of Musharka is strictly controlled by the strictly controlled by the

statutory rules framed by the statutory rules framed by the government Its commercial government Its commercial

activities are, however, activities are, however, influenced by the business influenced by the business

practices. practices.

Co-operative societiesCo-operative societies

This Musharka is also This Musharka is also governed by statutory rules. governed by statutory rules.

Its commercial activities are Its commercial activities are influenced by the practices influenced by the practices prevailing in the business prevailing in the business

community.community.

The modern Musharka principally The modern Musharka principally resembles Shirkah al-Inan. The details resembles Shirkah al-Inan. The details

are, however, considerably different due are, however, considerably different due to change of Urf and other factors to change of Urf and other factors

including modem commercial techniques, including modem commercial techniques, economic conditions and legal economic conditions and legal

requirements. requirements.

Let us discuss briefly the conditions of Let us discuss briefly the conditions of Musharka, which are those of Shirkah al-Musharka, which are those of Shirkah al-Inan. Other types of Musharka mentioned Inan. Other types of Musharka mentioned by jurists are nearly obsolete nowadays. by jurists are nearly obsolete nowadays.

Capital invested by partners may be Capital invested by partners may be unequal. unequal.

Majority of jurists, capital should be in Majority of jurists, capital should be in shape of currency and not the goods.shape of currency and not the goods.

Condition for capital in form of currency Condition for capital in form of currency was imposed when it was difficult to was imposed when it was difficult to refer goods in terms of currency.refer goods in terms of currency.

In barter systems jurists framed the In barter systems jurists framed the rules, now goods are generally referred rules, now goods are generally referred or accounted for in terms of currency.or accounted for in terms of currency.

This condition is waived in limited This condition is waived in limited companies and co-operative companies and co-operative societies as the capital is invested in societies as the capital is invested in the form of equal units of currency the form of equal units of currency called shares and the intended called shares and the intended partners buy as many shares as they partners buy as many shares as they wish. wish.

This practice has universally been This practice has universally been accepted as urf and is therefore accepted as urf and is therefore according to Islamic principles. according to Islamic principles.