MUSHARAKA

&
Mudarbah

Muhammad Iftikhar Baig

WHAT IS MUSHARAKA?
Musharaka literally means Sharing.
The word Musharaka has been
derived from Shirkah which
means being a partner.
It is an ideal alternative for the
interest based financing with far
reaching effects on the
economy.

WHAT IS MUSHARAKA?
Musharaka means a joint
enterprises formed for
conducting some business in
which all partners invest
capital in the form of money
or in kind.

Types of Shirkah
SHIRKAH

SHIRKAT-UL-MILK

IKHTIARI

SHIRKAT-UL-AQD

GAIR IKHTIARI

SHIRKATUL-AMWAL

SHIRKATUL-AAMAL

SHIRKATUL-WUJOOH

Presen
Shirkat-Ul-Milk
It means joint ownership of two or more
persons in a particular property.
This kind of Shirkah may come into existence
in two different ways:
1. Optional Shirkat-ul-Milk (Ikhtiari)
2. Compulsory Shirkat-ul-Milk (Ghair
Ikhtiari)

Presen
Shirkat-Ul-Milk
Optional Shirkat-ul-Milk (Ikhtiari)
If two or more person purchase any property,
it will be owned jointly by both of them and
the relationship between them with regard to
that property is called Shirkat-ul-milk.
Here this relationship has come into existence
at the option of the parties, as they
themselves elected to jointly purchase the
asset.

Presen
Shirkat-Ul-Milk
Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)
This comes into existence without any
effort/action taken by the parties.
For example, after the death of a person all
his heirs inherit his property, which comes
into their joint ownership as a natural
consequence of the death of that person.

SHIRKAT-UL-AQD

Presen
Shirkat-Ul-Aqd
Shirkat-ul-Aqd (contractual partnership)
means an agreement between two or more
parties to combine their assets, labour or
liabilities for the purpose of making profits.
It can also be translated as a joint ommercial
enterprise.

Presen
Shirkat-Ul-Aqd
Shirkat-ul-Aqd is divided into three types:
Shirtkat-ul-Amwal (contractual partnership)
Shirtkat-ul-Amal (vocational partnerships)
Shirtkat-ul-Wujooh (liability partnership)

Presen
Shirkat-Ul-Aqd
Shirkat-ul-Amwal (Contractual Partnership)
A partnership between two or more parties
whereby each partner contributes a specific
amount of money.
The profit is distributed according to the
partnership agreement and the losses are
borne in accordance with the contribution of
each partner to the capital.

Presen
Shirkat-Ul-Aqd
Shirkat-ul-Amal (Vocational Partnership)
It is an agreement between two or more
parties to provide services pertaining to a
profession, vocation or skilled trade.
The service partnership has no monetary
capital, because the subject matter of the
partnership is rendering services.
The profit shall be distributed among the
partners according to the agreed ratio, but
the contract should not specify that a lump
sum be paid from the profit to a particular
partner.

Presen
Shirkat-Ul-Aqd
Shirkat-ul-Wujooh (Partnership in Liability)
It is a bilateral agreement between two or
more parties to buy assets on credit on the
basis of their reputation for the purpose of
making profit.
The partnership in creditworthiness has no
monetary capital.
The profit shall be distributed according to the
agreement. However, the loss will be borne by
each partner according to the ratio that each
partner had undertaken to bear in proportion
to overall assets that are purchased on credit.

Presen
Musharakah
The term Musharakah has been introduced
recently by those who have written on the
subject of Islamic modes of financing
It is normally restricted to a particular type of
Shirkah, i.e. Shirkat-ul-amwal, where two
or more persons invest some of their capital
in a joint commercial venture.
However, sometimes it includes Shirkat-ulamal also where partnership takes place in
the business of services.

Features of
Musharaka
profit is shared according to an
agreed ratio between the
partners at the inception of
Musharaka Agreement.
However, according to Shariah
principles the loss is shared as
per the ratio of investment.

Features 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.

MUDARABA

WHAT IS MUDARABA?
Mudaraba is a special kind of
partnership where one partner gives
money to another for investing it in a
commercial enterprises.
The investment comes from the first
partner who is called Rabb-ul-Mal.
while the management and work is
an exclusive responsibility of the
other, who is called Mudarib.

Musharaka Vs Mudaraba
Musharaka

Mudaraba

All partners
invest.
All partners
share loss in the
ration of
investment.

Only Rab-ul-Mall
invests.
Only Rab-ul-Mall
suffers loss.

All partners can

take part in
management of

Mudarib is solely
responsible for
management of

Unrestricted and Restricted Mudaraba

An Unrestricted Mudaraba contract is a contract in which
the capital provider permits the Mudarib to administer a
Mudaraba fund without any restrictions. In this case, the
Mudarib has a wide range of trade or business freedom on
the basis of trust and the business expertise he has
acquired.
A restricted Mudaraba contract is a contract in which the
capital provider restricts the actions of Mudarib to particular
location or to a particular type of investment as the capital
provider considers appropriate, but not in a manner that
would unduly constrain the Mudarib in his operations.

Musharakah as a Mode of Financing

Musharakah can be successfully used to in the following areas:

Project financing
Working capital financing
Import Financing
Export Financing
Running finance
Saving account
Certificates of Investments
Term finance certificates
Treasury Bills
Inter bank lending/borrowing

Mudaraba in Banking

RAB-UL-MAL

DEPOSITS

INVESTMENTS

INVESTMENT
ACCOUNT HOLDERS

ISLAMIC BANK

MUDARIB

ISLAMIC BANK

ENTREPRENEUR

Mudaraba in Banking
Deposits - The Bank as Mudarib

Profit from the Mudaraba activity is shared between the

Bank (as Mudarib) and the investment account holder (as
Rabb-ul-maal) in a pre-agreed ratio

The Bank does not bear any loss but remains responsible for
negligence

The Bank may receive from its investors compensation

(Mudarib fees) in return for management of their funds

The Bank is bound to return the capital to the investors after

deducting any losses or Mudarib fees at the time of winding
up the contract

Mudaraba in Banking
Investments - The Bank as the Rabb-ul-maal

Profit from the Mudaraba activity is shared between the Bank

(as Rabb-ul-maal) and the Mudarib in a pre-agreed ratio

The Bank will bear all the loss unless the Mudarib violates the
agreement

The Bank will pay to the Mudarib, compensation (Mudarib

share ) in return for management of its funds

The Mudarib is bound to return the capital to the Bank after

deducting any losses or Mudarib fees at the time winding up
of the contract