Musharaka is one of the basic Islamic financial instruments. Musharaka in literal translation means division. In Islamic finance, the term refers to a company in which all partners take part in the profits and losses of the undertaking undertaken. The musharak contract is a contract in which two or more entities set up a business and each of them puts at its disposal capital, work and takes an active part in the management. Profit is divided between the parties according to the principles agreed in the contract, however, it is not allowed to set a fixed amount of profit for payment. In the event of a loss, it is divided proportionally to the capital invested. The general rule regarding musharak says that all parties to the contract participate in costs, work and management. However, there is a possibility that one of the parties would be excluded from providing work or doing business. In this case, the participation in the profits of the "passive" partner must be proportional to its capital share in the given project. The share of partners does not have to be identical. It can take the form of physical assets, but it can also be intangible, such as knowledge, experience and even good will.
Musharaka in modern Islamic banking
Musharaka as a method of financing, may consist in the transfer of an advance payment by the bank to the customer's account. In this situation, the bank assumes the role of a "passive" partner. Musharaka can also be a form of running investment funds in which buyers of participation units become "passive" partners.
Types of Musharaka
There are several types of musharakah:
- Shirka al'nan - each partner answers for own part (doesn't take financial responsibility for other partners)
- Al Mufawada - equal partnership, where every partner puts the same amount of money and share the same profit
- Permanent - without ending date
- Diminishing - share of one partner is transferred to another until the first partner is paid off.
Muskaraka a mudaraba
In comparison to the mudaraba contract, where the owner of the capital can not interfere in running a business, the musharak contract gives all parties the opportunity to make operational decisions. Mudaraba and musharak are the most popular instruments used to finance all kinds of undertakings. Both contracts played a huge role in the medieval Islamic world, when they were used to mobilize capital for agriculture, fleet, craft or trade with distant countries.
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- Ahmed, M. (2006). Practice of mudaraba and musharaka in Islamic banking.
- Akram, M., Rafique, M., & Alam, H. M. (2011). Prospects of Islamic banking: reflections from Pakistan. Australian Journal of Business and Management Research, 1(2), 125.