ISLAMIC FINANCE

PRESENTATION
MUSHARAKAH

T o : M a m . R a i sha m H a ye e
F r o m : A b d u l W a ha b B u t t
M T N- 2 1 - 1 2 6 1 5
M.Sc. Accounting and Finance
F o u r th S e m e st e r
 MUSHARAKAH
CONTENTS

1) Meaning of Musharakah.
2) Comparison of Modern Economic System and
Islamic Principles.
3) Concept of Musharakah.
4) Basic Rules of Musharakah.
5) Management of Musharakah.
6) Termination of Musharakah.
7) Termination of Musharakah without closing the
business.
 MEANING OF MUSHARAKAH

Musharakah is a word of Arabic Origin which literally

means sharing.
The shirkah more commonly used in the Islamic
jurisprudence.
In the context of business and trade it means a joint venture
in which all the partners share the profit or loss of the joint
venture.
Musharakah does not envisage a fixed rate of return, return
rate is based on the actual profit earned by the joint venture.
Financer in interest-bearing loan can not suffer loss while
financer in Musharakah can bear loss.
 COMPARISON
MODERN ECONMY
o If industrialists having only 10
million of their own, acquire 90
million from the bank to start a huge
profitable project.
o 14% or 15% fixed rate of return on
investment will go to the depositors
through the bank.
o If the industrialists earn huge
amount of profit, the bank is still
entitled to the fixed rate of return on
investment.
o In favor of the rich and against the
interest of poor.
ISLAMIC PRINCIPLES
o Financer must determine whether
he is advancing loan humanitarianly
or he desires to share his profit.
o The return of the financer in
Musharakah has been tied up with
the actual profit acquired by the
enterprise.
o Greater profit, greater returns to the
depositors. However, the loss will be
shared proportionately to the
investment.
o In favor of the common people.
 CONCEPT OF MUSHARAKAH

Musharakah has been divided into 2 kinds:

1.Shirkat-ul-Milk.
It means joint ownership of tow or more persons in a particular
property. This kind of shirkah may come into existence in two
different ways:
• (Optional)If two or more persons are purchasing a equipment and
they decided that equipment will be in ownership of all of them with
their own will, regarded as Shirkat-ul-Milk.

• (Compulsory)Shirkat-ul-Milk sometimes operate automatically

without any action taken by the parties, like after the death of a
person all of his property is automatically inherited into a joint
ownership to his heirs.
 CONCEPT OF MUSHARAKAH

Musharakah has been divided into 2 kinds:

1.Shirkat-ul-Aqd.
Second type of Shirkah which means a partnership
effected by a mutual contract for the purpose of
business.
Shirkat-ul-Aqd is divided into three kinds:
• Shirkat-ul-Amwal.
• Shirkat-ul-Amal.
• Shirkat-ul-Wujooh.
 CONCEPT OF MUSHARAKAH

Shirkat-ul-Aqd is divided into three kinds:

1.Shirkat-ul-Amwal
Where all the partners invested some capital into a commercial
enterprise to give some sort of services like, Doctors, Consultancy
Offices, Electrician Services or Universities etc.
2.Shirkat-ul-Amal
Where all the partners gather their capital to run a manufacturing
unit, it is also known as Shirkat-ul-Taqabbul or Shirkat-ul-Sana.
3.Shirkat-ul-Wujooh
Where all the partners invested their capital to do a trading business,
they have to invest currently for the buying and selling of goods. In
this partnership, they don’t have to manufacture their own products.
 BASIC RULES OF MUSHARAKAH
Musharakah is truly based on a relation through a mutual valid contract.

 Distribution of Profit
 Proportion of profit to be distributed should be agreed at the time of contract.
 Ratio of profit must be determined in proportion to the actual profit earned,
not on the capital invested by the partners.
o Ratio of Profit
 According to Imam-Malik and Imam-Shafi: Get profit in proportion to the
investment. It means if A has invested 40% of capital, he will get 40% of the
profit. More or less than 40% profit return will make the contract invalid.
 According to Imam-Ahmad: Ratio of profit may differ from the ratio of
investment, if it is agreed between the partners. If A has invested 40% of the
capital, he can get 60%-70% of the profit and if B has invested 60% of the
capital, he can get 30%-40% of the profit.
 Imam-Abu-Hanifah: Profit rate may differ from the investment rate but if A
is a sleeping partner, his profit cannot be more than the investment.
 BASIC RULES OF MUSHARAKAH

 Sharing of Loss
 A has to suffer 40% of loss if he has invested 40% of
the capital, not more or less.
 Imam-Abu-Hanifah\Imam-Ahmad
Any change in contract of this condition will make it
invalid-contract.
o Nature of Capital
• Must be in liquid\cash form.
• Not any commodities.
• Three Views:
 BASIC RULES MUSHARAKAH

• Three Views:
• Imam-Malik
Liquidity of capital is not any condition. Capital can be in
form of commodity, but profit share would be determined on
evaluating the market price.
• Imam-Abu-Hanifah
Capital must be in liquid form.
Reason 1 Commodity is in ownership of person while money
has no differences.
Reason 2 It would be a complex procedure, in situation of
redistribution of share-capital to each partner.
 BASIC RULES OF MUSHARAKAH

• Three Views
• Imam-Shafi
2 Kinds
a) Dhawat-ul- Amthal: Commodity which, if
destroyed, can be compensated by similar
commodity like wheat, rice etc.
b) Dhawat-ul-Qeemah: Commodities which cannot
be compensated by similar commodities.
 MANAGEMENT OF MUSHARAKAH

A normal principle of Musharakah is that every

partner has right to take part in the management and
to do work for it. However, partners may agree upon a
condition that management shall be carried out by one
partner. But in this condition the sleeping partners
shall be entitled to the profit only to extent of there
investment.
 TERMINATION OF MUSHARAKAH

 Musharakah is considered terminated in any of the

following events:
• Every partner has right to terminate the Musharakah
at any time after giving his partners a notice to this
affect, Musharakah will come to an end. In this case, if
the assets of the Musharakah are in cash form, all of
them will be distributed at pro-rata between the
partners. But if the assets are not liquidated, they may
agree either on the liquidation of assets, or on their
distribution\partition between the partners as the
assets are.
 TERMINATION OF MUSHARAKAH

o Following events:
• If any partner dies during Musharakah, the contract
of Musharakah will be terminated. His heirs in this
case should:
1. Draw shares of deceased.
2. Continue with Musharakah.

• If any partner becomes insane or incapable of

affecting commercial transaction, Musharakah
stands terminated.
TERMINATION OF MUSHARAKAH WITHOUT CLOSING
THE BUSINESS

If one partner A wants to terminate while the other

two partner B & C want to continue the Musharakah, it
is possible through a mutual agreement. B and C may
purchase the share of other partner A . Musharakah
will continue among the standing partners B and C
because if one partner is terminating the musharakah
it does not imply its termination to other partners.