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Musharakah

'Musharakah' is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture.
It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, 'Musharakah' can play a vital role in an economy based on Islamic principles.
The proportion of profit to be distributed between the partners must be agreed upon at the time of affecting the contract. If no such proportion has been determined, the contract is not valid in Shari'ah.
The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the
Capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners or any rate of profit tied up with his investment.
But in the case of loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of his investment.
In spite of all the benefits, Musharakah is almost nonexistent in the Islamic banking and finance markets due to various complexities.

Risks associated with Musharakah:

  • Risk of Loss: It is argued that the arrangement of Musharakah is more likely to pass on losses of the business to the financier bank or institution. This loss will be passed on to depositors also. The depositors, being constantly exposed to the risk of loss, will not want to deposit their money in the banks and financial institutions and thus their savings will either remain idle or will be used in transactions outside of the banking channels, which will not contribute to the economic development at national level.
  • Dishonesty: Another apprehension against musharakah financing is that the dishonest clients may exploit the instrument of musharakah by not paying any return to the financiers. They can always show that the business did not earn any profit. Indeed, they can claim that it has suffered a loss in which case not only the profit, but also the principal amount will be jeopardized.

    The Shari'ah parameters applicable to Musharakah type of financing are:

    • In musharakah every partner has a right to take part in its management and to work for it. However, the partners may agree upon a condition that the management shall be carried out by one of them, and no other partner shall work for the musharakah. But in this case the sleeping partner shall be entitled to the profit only to the extent of his investment, and the ratio of profit allocated to him should not exceed the ratio of his investment. However, if all the partners agree to work for the joint venture, each one of them shall be treated as the agent of the other in all the matters of the business and any work done by one of those in the normal course of business shall be deemed to be authorized by all the partners.

      The proportion of profit to be distributed between the partners must be agreed upon at the time of affecting the contract. If no such proportion has been determined, the contract is not valid in Shari'ah. The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners or any rate of profit tied up with his investment. Therefore, 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, if it 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 percentage of the actual profit accrued to the business. If a lump sum amount or a certain percentage of the investment has been agreed for any one of the partners, it must be expressly mentioned in the agreement that it will be subject to the final settlement at the end of the term, meaning thereby that any amount so drawn by any partner shall be treated as 'on account payment' and will be adjusted to the actual profit he may deserve at the end of the term. But if no profit is actually earned or is less than anticipated, the amount drawn by the partner shall have to be returned.



    The application of Musharakah in different types of financing are:

      Application of Musharakah in domestic Trade: Here the bank enters into a partnership agreement with the client for sale and purchase of local goods whose specifications are given by the client. The total cost of the goods is divided between the parties and both parties agree to contribute their shares of cost of the goods. A special Musharakah account is opened at the bank immediately after the signing of the contract, which specifies all the transactions pertaining to this account. It is the responsibility of the partners to arrange the purchase and sale of goods. An agreed percentage of the profit is given to the client in case of profit and if there is a loss all the partners share the loss according to their contribution in the Musharakah. In Sudan, Al Barakah bank is using this technique to finance the purchase and sale of local goods.

      Application of Musharakah to the importation of goods: the importer requests the bank to participate in the import and sale of certain goods. The total cost of importing the goods is declared and the capital contribution of each party is specified.

      Letters of credit on a Musharakah basis: the customer informs the bank about the requirements of the letter of credit. The bank, after analyzing, the proposal asks the customer to deposit his portion of the Musharakah, and the bank contributes its portion. A letter of credit is then issued by the bank for importation of goods.

      Application of Musharakah in agriculture: this is being experimented in Sudan. Here the bank provides the farmer with ploughs, tractors, irrigation pumps, sprayers etc. and some working capital such as seeds, pesticides and fertilizers etc. The farmer contributes his land, labor and management to the Musharakah. When the crop is ready the farmer gets 30% as his reward for management and labor. The rest 70% is distributed between the farmer and the bank according to the pre agreed ratio.

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