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8/11/2014 1Islamic Finance. Dr . Zohra Jabeen
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Musharakah Finance
Islamic Finance
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Table of Contents
Concept & Definition Musharakah in Quran and Hadith
Pillars of Musharaka
Process flow diagram of Musharakah
Kinds of Musharakah Basic Rules & Feathures
Distribution of profit & loss
Termination Musharakah in Islamic Banking
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Musharakah
Musharakah Arabic origin word. literally means sharing
derived from Shirkah which means being a
partner. In the context of business and trade it means a
joint enterprise in which all the partners sharethe profit or loss of the joint venture
It is an islamic mode of financing and alternativeto interest-based financing or banking.
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The Concept of Musharaka
Musharakais a joint venture partnership
where by two (or more) parties contribute to
the capital and participate in the managementto execute a potentially successful project
with the purpose of earning halalprofit, which
will be shared among the partners.
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Musharakah in Quran and Hadith
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Allah has declared
that He will become a partner in a businessbetween two Musharik (partners) so long as
they do not indulge in cheating or breach of
trust (Khiyanah).
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PILLARS OF MUSHARAKAH
1. Shuraka
Shareholders
2. RasulMal
Capital
3. Mashru Project or business venture
4. Ribh
Pre-determined profit allocation
5. Sighah
Ijab (Offer)
Qabul (Acceptance )
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Processflow
Rasul-Mal
(Capital)Mashru
(Project)
Shuraka
(Shareholders)
Shuraka
(Shareholder)
Ribh(Predeter
mined
profit
rate)
Ijab & Qabul
Profit/Loss
Profit/Loss
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Kinds of Musharakah
SHIRKAH (Partnership)
Shirkat-ul-Milk (Joint ownership)
By Choice Without Choice
Shirkat-ul-A'qd (Business partnership)
A'amal (partnership in work) Wujooh (reputational partnership)Amwaal (partnership with capital)
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Kinds of Musharakah
Shirkat ul-milk(partnership of ownership): It means jointownership of two or more persons in a particularproperty.
This kind of Shirkah may come into existence in two different
ways.1. By the partners choice: means coming into the
operation at the option of the parties. For example, iftwo partners agree to buy equipment it will be ownedjointly by both of them.
2. Without the partners choice: means coming into theoperation automatically without any action taken bythe parties. For example, if property is inherited.
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Cont
Shirakal al-aqd(partnership of a contract):
means a partnership through a mutual contract.
This kind of Shirkah exists in three types:
1. Shirkal ul-amwal(financial company): all thepartners invest some capital into a commercialenterprise.
2. Shirkat ul-amal(company of workmanship): all thepartners jointly undertake to render some services
for their customers and the fee charged from themis distributed among them according to an agreedratio.
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Cont
3. Shirkal ul-wujooh:
Wujooh refers to goodwill, creditworthiness, and good
reputation.
Creditworthiness and reputation as a form of wealth Partnership upon credit is where two persons who do not
contribute any property, become partners by agreeing to
purchase goods jointly upon their personal credit (without
immediately paying the price) and to sell them on their joint
account.
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Cont
Both partners do not contribute any capital. They purchase
commodities at a deferred price and sell them for cash.
Partner may equally share the profit. It is also possible that
one of the partners may own a greater share of the goods
than the others based on an agreed ratio.
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Rules of Musharaka
Management of Musharaka
Each partner has a right to take part in Musharaka
management.
The partners may appoint a managing partner by
mutual consent
One or more of the partners may decide not to work
for the Musharaka and work as a sleeping partner.
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The basic rules and Features of Musharakah
Investments come from all partners/shareholders
hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually
agreed in the contract.
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The basic rules and Features of Musharakah
The existence of Mutaaqideen(Partners):
Capability of Partners: Must be sane & mature andbe able of entering into a contract.
The contract must take place with free consent ofthe parties without any fraud or misrepresentation.
If one or more partners choose to become non-working or silent partners, the ratio of their profit
cannot exceed the ratio which their capitalinvestment.
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Cont
It is not allowed to fix a lump sum amount for any of
the partners,or any rate of profit tied up with his
capital.
A management fee however, can be paid to thepartner managing the Musharakah provided the
agreement for the payment of such fee is
independent of the Musharakah agreement.
Losses are shared by all partners in proportion to
their capital.
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Cont
All assets of Musharakah are jointly owned in
proportion to the capital of each partner.
All partners must contribute their capital in terms of
money or species at an agreed valuation. The presence of the commodity: This means the
price and commodity itself.
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Cont
The rate of profit sharing should be determined: The
share of each partner in the profit earned should be
identified at the time of the contract. If however, the
ratio is not determined before hand the contractbecomes void (Fasid).
Therefore identifying the profit share is necessary.
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The proportion of profit to be distribution
among the partners must be determined and
agreed upon at the time of contract.
Otherwise the contract is not consider valid
under shariah.
Distribution of Profit
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ILLUSTRATION
If A and B enter into a partnership and it is agreed
between them that A shall be given Rs. 10,000/-
per month as his share in the profit, and the rest
will go to B, the partnership is invalid. Similarly, ifit is agreed between them that A will get 15% of
his investment, the contract is not valid. The
correct basis for distribution would be an agreed
percentages of the actual profit accrued to the
business.
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Islamic jurist views
According to Imam Malik and Imam shafi, it is
necessary that each partner's share the profit
is exactly equal to the proportion of initialinvestment into the partnership
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according to the Imam Ahmad, the ratio of
profit distribution may vary without restriction
from the ratio of investment.
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According to the Imam Abu Hanifah, the ratio
of profit distribution may vary. However for
silent partner (non active member who only
contribute capital ).it can not be any higherthen the ratio of investment.
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Sharing of Loss
In the case of losseach partner shallsuffer the loss exactlyaccording to the ratio
of his investment. If apartner has invested40% of the capital, hemust suffer 40% of the
loss, not more, notless.
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Nature of capital
According to the Imam Malik and
Hambali jurist, the nature of capital is not
a restriction in musharakah arrangement.Therefore in kind (non cash) contribution
of partners are allowed, which are based
on the market value of the commoditycontributed.
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According to the Imam Abu Hanifah and ImamAhmad, no in kind contribution are allowed inmusharakah arrangement.
According to the Imam Shafi, makesdistinction between replaceable and
irreplaceable commodities.The view of Imam Malik has been widelyaccepted.
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Termination of Musharakah
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Termination of Musharakah
Musharakahis deemed to be terminated in any oneof the following events:
(1) Every partner has a right to terminate theMusharakah at any time after giving his partner a
notice to this effect, whereby the Musharakahwill come to an end.In this case, if the assets of the musharakah are incash form, all of them will be distributed pro ratabetween the partners. But if the assets are not
liquidated, the partners may agree either on theliquidation of the assets, or on their distributionor partition between the partners as they are.
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Cont
IN CASE OF A DISPUTEIf there is a dispute between the partners in thismatter i.e. one partner seeks liquidation whilethe other wants partition or distribution of the
non-liquid assets themselves, the latter shall bepreferred, because after the termination ofmusharakah, all the assets are in the jointownership of the partners, and a co-owner has aright to seek partition or separation, and no one
can compel him on liquidation. However, if theassets are such that they cannot be separated orpartitioned, such as machinery, then they shall besold and the sale-proceeds shall be distributed.
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Cont
(2)If any one of the partners dies during themusharakah, the contract of musharakah withhim stands terminated. His heirs in this case,will have the option either to draw the shareof the deceased from the business, or tocontinue with the contract of musharakah.
(3)If any one of the partners becomes insaneor otherwise becomes incapable of effectingcommercial transactions, the musharakahstands terminated.
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Cont
If one of the partners wants termination of themusharakah, while the other partner or partnerslike to continue with the business, this purposecan be achieved by mutual agreement. The
partners who want to run the business maypurchase the share of the partner who wants toterminate his partnership, because thetermination of musharakah with one partner
does not imply its termination between the otherpartners.
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Cont
However, in this case, the price of the share of
the leaving partner must be determined by
mutual consent, and if there is a dispute
about the valuation of the share and thepartners do not arrive at an agreed price, the
leaving partner may compel other partners on
the liquidation or on the distribution of theassets themselves.
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Musharaka in Islamic Banks
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Islamic banks in Pakistan
Some of the islamic banks that deal
musharakah financing are as follow.
Mezan Bank
Bank Islami
Al-Baraka Bank
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Application of Musharakah in Meezan Bank
Liability side
Meezan Bank has successfully launched Riba Free
Certificates of Islamic Investment (COII) in 2000
Recently Meezan Banks has also introduced
Saving accounts based on Musharakah
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Musharakah Sukuk
Musharakah Sukuk are securities in which itsholders are owners of a specified property in
common. Sukukholders will gain (lose) from any
increase (decrease) in the underlying assetprices. (S.A.Mousavian,2006)
Musharakah Sukuk have a specified maturity
date, and are negotiable in the secondarymarket.
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Riba Free COII
Product Features
Name: Riba Free Certificate of Islamic Investment.
(COII)
Tenure: 3 month, 6 month, 1 year, 2 years, 3 years
& 5 years
Minimum Investment: Rs. 50,000/-
Profit option: Monthly, Quarterly, at Maturity
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Riba Free COII
Basic Concept:
Riba Free COII is a Musharakah-based contract
between Meezan Bank and its customer.
All the principles and rules pertaining to
Musharakah are strictly adhered.
Profit and loss is shared according to the rules of
Islamic Fiqh.
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Riba Free COII
Depositor is a partner with the bank in an
investment pool formed as a result of
Musharakah
The Bank acts as an investor as well as a workingpartner
Whereas the depositors are investors and
sleeping partners.
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Riba Free COII
Profit depends on the return of this pool and iscalculated on a quarterly basis.
Investors share the profit in a pre-agreed ratio
In case of a loss the Investor is liable to share it inthe ratio of investment
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Application of Musharakah in Meezan Bank
Asset Side
On the Asset side Meezan Bank has successfully
used Musharakah for fulfilling the financingneeds of its customers.
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Application of Musharakah in Meezan Bank
Sitara MTFCMeezan Bank acted as a joint lead manager and
Shariah Advisor in successful issuance of Sitara
Chemical Industries Musharakah Term Finance
Certificates.
The transaction has achieved financial close of Rs
225 million in private placement.
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Musharaka Sukuk in Practice
US$550 million sukuk transaction for Emiratesairline, the seven-year deal was a structured on aMusharaka contract. The Musharaka or joint
venture was set up to develop a new engineeringcentre and a new headquarters building on landsituated near Dubai's airport which will ultimatelybe leased to Emirates. Profit, in the form of lease
rentals, generated from the Musharaka venturewill be used to pay the periodic distribution onthe trust certificates.
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ASKARI HOME MUSHARAKAH
(MUSHARAKAH HOME FINANCE)
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Askari Home Musharakah: How it Works?
Joint ownership is created in the property between Bank &Customer on the basis of the Musharakah Agreement. (Thisis bases on the principles of Shirkat ul Milk).
Banks share is divided into units and is given to the clienton rent.
Client promises to purchase Banks share (units) over thetenure of transaction.
Client purchases the units every month and will eventuallybecome the owner of the property.
Rental amount will be adjusted according to the banks
share (units) remaining in the property. Askari Home Musharakah has tailor made solutions to meet
your needs
s a c a ce ese tat o
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..
Alhamdolillah!