What is Musharkah Finance

 

The Main Features Of Musharakah

Musharakah is a term used by contemporary Muslim jurists for both broad and limited connotations. It is a term frequently referred to in the context of Islamic modes of financing, but is a little more limited than the term shirkah, which is more commonly used in Islamic jurisprudence. In traditional books, joint businesses have been discussed mainly under the heading of shirkah, which is regarded as a set of broad principles that can accommodate many forms of joint business. Contemporary Muslim jurists use the term musharakah in a limited sense to mean a contractual partnership in which all partners provide funds or capital, through not necessarily equally. They have the right to work for the joint venture, conduct it jointly and agree to share the profit on a pre-determined ratio and to bear the loss, if any, to the extent of the investment of each partner. In a specific sense, it is an amalgam of musharakah and Mudarabah, where a mudarib (the entrepreneur partaking in a mudarabah), as well as the financier partner, also invests in the capital. This arrangement is also permissible, according to Muslim jurists. Another form of musharakah, developed more recently, is

'Diminishing Musharakah'. According to this concept, a financier and his client participate either in the joint ownership of a property, or piece of equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier, one by one, periodically, until all the units of the financier have been purchased by the client so as to make the client the sole owner of the property or the commercial enterprise. 'Diminishing Musharakah' will be discussed more fully in a separate lesson.

Musharakah

Musharakah is a relationship that is established between parties by a mutual contract, so all the necessary ingredients of a valid contract must be present here also. It is the modern term for Shirkah Al Amwal structured on the basis of “inan”. In addition, there are number of conditions that are special to the contract of musharakah. Musharakah is not a binding contract and any partner may unilaterally terminate it unless provided otherwise in the contract.

The key features of musharakah may be summed up as below:

(a) All the partners provide capital

(b) Profit sharing may be based on capital contribution, or negotiable, or depending on the work performed by a partner

(c) Loss will be shared only according to capital contribution

(d) Management by all the partners is not a requirement

(e) Musharakah is not a binding contract

Musharakah Agreements by Islamic banks

An Islamic bank can finance industry, trade, real estate, contracting and almost all legal enterprises through partnership. Musharakah is arranged on the basis of a written agreement between the bank and the client for a specific transaction, consignment, or project or for a fixed period of time that can be renewed. They can also enter into musharakah with interest-based banks to carry out operations acceptable in the Shari´ah, provided it is ensured that the rules and principles of the Shari´ah are observed during the operation of the partnership. A partnership business or its assets can also be securitised, giving Musharakah Certificates or Sukuk (bonds) to the investors. Clients desiring to raise funds for investment in a large project can use musharakah and offer to sell Musharakah Certificates in the market. The Musharakah Certificate represents the direct pro-rata ownership of the holder in the assets of the project. If all the assets of the project are in liquid form, the certificate will represent a certain proportion of money at face value owned by the project; in such cases the Musharakah Certificates cannot be sold in the market except at their face value, as an increase would fall under the prohibition of riba under the Shari’ah. However, after the project is started and has acquired non-liquid assets representing tangible assets, these certificates can be traded in the secondary market and above the par value. It is allowed under the Shari’ah, as the subject matter of the sale is a share in the tangible assets and not in money alone; therefore the certificate may be taken as any other commodity which can be sold at a profit or at a loss. In the case of a completed project, the business will involve a combination of tangible assets and non-liquid assets arising from the sale in business transactions. In such cases, the Muslim jurists generally find it acceptable to trade in Musharakah Certificates, where the musharakah portfolio should not comprise more than 50% in the form of nonliquid assets.

Profit projections can play an important role in the musharakah operations. The client is required to provide the bank periodically with the results of operations of the business. Disputes can be resolved through a Review Committee comprising persons to be named in the musharakah agreement or separately with the mutual understanding of the parties. Musharakah-based applications and instruments will be discussed in detail in the Modules on Islamic Banking Operations and Islamic Financial Markets.