Musharaka Mode of Islamic Banking

7/27/2019 Musharaka Mode of Islamic Banking

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Islamic Mode of Finances

MUSHARAKAH


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Islamic Mode of Finance1. Trade based

a. Musawamahb. Murabaha

c. Ijarah

d. Bai Salam

e. Bai Istisna

2. Sharing Based (Partnership)

a. Musharakah

b. Diminishing Musharakah

c. Mudarabah

3. Debt based

- Qard


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MUSHARIKA Derives from Shirkah Literal Meaning being a

partner

It is used in the same context as the term Shirkmeaning partner to Allah

Under Islamic Jurisprudence, Musharaka means a jointenterprise formed for conducting some business inwhich all partners share the profit according to thedecided ratio while the loss is shared according to the

ratio of the contribution.


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Continues..

Interest determines a fixed rate of return whileReturn in Musharakah is based on actual profit & loss

Interest-bearing transaction Financier cannotsuffer loss

Musharakah transaction - Financier can sufferloss

The partners share capital, management, profit andrisk and every partner is trustee, guarantor, andagent on behalf of the other partner.


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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.)


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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.

Optional: When parties opt

to make a partnership. For e.g

Ghair Ikhtiari

(Compulsory)(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


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SHIRKAT-UL-AQD

Shirkat-ul-Amwal

(Parnership in capital)

Where all partners invest

capital into a

commercial enterpriseand share in profit.

Shirkat-ul-Aamal(Partnership in Services)

Where all partners jointly

undertake to render some services

for their customers and the fee

charged from them is distributed

among them according to an agreed

ratio.

Shirkat-ul-Wujooh(Partnership in goodwill)

Where partners have no investment

at all. All they do is that they

purchase the commodities on a

deferred price and sell them at spot.The profit so earned is distributed

between them at an agreed ratio.


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Basic rules of Musharakah


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All partners must have the contractual

capacity

Each partner has a right to take part inMusharakah management

However, the partners may appoint aManaging Partner by mutual consent. In thiscase the other partners will become sleepingpartners. And will only be entitled to share in

profit in proportion to their investment.

All active partners are treated as agent ofothers in all matters of business.

MANAGEMENT OF MUSHARAKAH:


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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


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Distribution of profit

The ratio of profit distribution should be agreed at

the time of execution of contract otherwise contractis 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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Continues..

Sleeping partners share of profit cannot be

more than his share of capital in the business.


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SHARING OF LOSS

Loss to be shared exactly in ratio of investmentwhile Profit is based on agreement of the parties,

but loss is always subject to the ratio ofinvestment


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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


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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 theproceeds to be distributedb) The assets may be distributed in theirexisting form after valuation


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Continues.. 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 Bwants continuation, B can continue by

purchasing the shares of A.

A condition in the agreement can be includedwhich require consent of all partners for the

termination of Musharakah


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Dispute resolution

Provision of review committee can be

added to the agreement which will

resolve the difference arising betweenthe partners.


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USES of Musharakah

Asset side Financing: LC with margin

SME set up financing

Machinery financing

Project Financing

Import financing


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Continues..

Liability side financing:

Deposits giving profit on musharakah basis

Islamic musharakah bonds


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Documents

Musharaka Mode of Islamic Banking