CONTRACTUAL BASES IN ISLAMIC FINANCE

Musharakah Contract

Definition of Musharakah
A partnership where both parties combine resources, both capital and labor to undertake a certain project.

A partnership agreement between two or more individuals or bodies Each contributing capital Profit or loss is shared between the partners according to the agreed ratios

Musharakah

Musharakah is better known as Syarikat which is described as a grouping of capital by shareholders to finance a particular project and the profit from the project is divided according to agreed ratio. If the project incur losses then the losses are borne by the shareholders according to their percentage share.

PROJECT FINANCING CONTRACT: TRUSTEE PROFIT SHARING AL- MUSHARAKAH

The Bank and the Entrepreneur will provide the financing for the project. Both parties have the right to participate in the management of the project. Both parties will negotiate on the ratio of distribution of profit. In the event of loss, both parties will bear the loss proportionately to their share of financing.

Essentials (Rukun) of Musharakah

Shareholders or partners Capital Project Profit Contract (Offer & Acceptance)

AL-MUSYARAKAH FINANCING
1. BANK AND CUSTOMER PROVIDE CAPITAL FOR THE PROJECT E.G. RM 6 MILLION FROM BANK & RM 4 MILLION FROM CUSTOMER. BOTH PARTIES AGREE ON PROFIT SHARING RATIO (E.G. 70:30) I.E. 70% OF GROSS PROFIT TO BE DISTRIBUTED TO CUSTOMER ; 30% TO BANK.

2.PROJECT

30 %
60%

3. PROFIT

70 %
40%

4. CAPITAL/LOSS

Example: Musharakah Financing

Contract Value - RM 12 million Cost of Purchase - RM 10 million Profit - RM 2 million Capital contribution 60% by Bank - RM 6 million 40% by customer - RM 4 million Profit sharing ratio 30% to the Bank - RM 0.6 million 70% to the customer - RM 1.4 million Contract payment received within 3 months

Example: Musharakah Financing

On a per annum basis, the return: @ to Bank - 40% ( 0.6/6 *100*4 ) @ to customer - 47% ( 1.4/12*100*4 ) Should there be a loss, both parties will bear the loss in proportion to thecapital contribution.

Necessary Conditions (Hukum) of Musharakah

The Musharakah capital must comprise assets which is either money or goods that can be valued in the terms money. The profit-sharing ratio (which need not be the same as percentage shareholding) shall be determined at the point of Akad (execution of contract) Each shareholder is an owner of the Syarikat and has a right to run the project on his own behalf and on behalf of other shareholders as Agent

Necessary Conditions (Hukum) of Musharakah

Loss sharing except for those caused by deceit or negligence, is according to percentage shareholding. All Musharakah project must be HALAL projects.