Musharaka-Partnership

Musharaka-Partnership

AAOIFI says- “It is the commingling of funds for the purpose of sharing in profit as per agreed ratio, but loss (if any) should be divided before the partners in proportion to their equity.”

One, two or more entrepreneurs approach an SIBL bank to request the financing required for a project.  The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.

Musharaka may take two forms:
i)    Permanent Musharaka
ii)    Diminishing Musharaka.

Application of Permanent Musharaka  

     
Permanent Musharaka is helpful in providing financing for large investments in modern economic activities.  SIBL banks can engage in Musharaka partnerships for new or established companies and activities.  Islamic banks may become active partners in determining the methods of production cost control, marketing, and other day-to-day operations of a company to ensure the objectives of the company are met.  On the other hand, they can also choose to either directly supervise or simply follow up on the overall activities of the firm. As part of the agreement, Islamic banks will share in both profits and losses with its partners or clients in operations of the business. 

 Application  of Diminishing Musharaka

 The decreasing Musharaka is suitable for the financing of industrial businesses that have regular income. It can be considered to be the appropriate mode to finance collective investment. In this arrangement, the bank earns periodic profits throughout the year and it encourages the partner to participate in the joint investment.

In addition,it fosters individual ownership by allowing the partner to gradually buy the bank’s ownership interest. In terms of society as a whole it corrects the course of the economy by developing a mode of positive partnership instead of the negative relationship of indebtedness. In addition, it assists in the equitable distribution of society’s wealth.   

Financing through a Musharaka partnership is investment-based. The capital provider has full control in the management of the business. In addition, he shares proportionately in both the profits and losses of the business. Therefore, the rate of return is uncertain and can be either positive or negative. The cost of capital is also uncertain and there exists perfect correlation between the relationship of cost of capital and rate of return on capital.