Islamic Financial

Products and Processes

Ameenullah Sheikh
ameenullah.shaikh@iqra.edu.pk

MUSHARAKA Equity
Financing-

Musharaka - Illustration

Partner

Partner

60% ownership

40% ownership

Musharaka
(Partnership)

Musharaka

Musharaka literally means sharing

Musharaka means a joint pool of funds formed for conducting some

business in which all partners share the profit according to an agreed
ratio while the loss is shared as per the ratio of investment

All partners have a right to participate in the

management of the project. However, the partners
also have a right to waive the right of management
in favor of any specified partner or person

MUSHARAKAH

FROM HADITHS

Categories of Shirkah

SHIRKAH

SHIRKAT-UL-MILK

IKHTIARI
(Optional)

SHIRKAT-UL-AQD

GAIR IKHTIARI
(Mandatory)
SHIRKATUL-AMWAL

SHIRKATUL-AAMAL

Shairkat-ul-Mufawada

SHIRKATUL-WUJOOH

Shirkat-ul-Inan

MUSHARAKAH
It has been divided into two kinds:
SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a particular
property without any commercial intention.
SHIRKAT-UL-AQD
Joint venture of two or more persons in a particular property with
commercial intention.

MUSHARAKAH
SHIRKAT-UL-MILK
This kind of Shirkah may come in to existence in two
different ways:

A. Optional Shirkat-ul-Milk (Ikhtiari)

e.g. A & B jointly purchase a House
B.

Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

e.g. B & C are the joint owners of inherited car

MUSHARAKAH
SHIRKAT-UL-AQD

Shirkat-ul-Aqd is divided in to three types:

a. Shirkat-ul-Amwal
b. Shirkat-ul-Aamal
c. Shirkat-ul-Wujooh

MUSHARAKAH
SHIRKAT-UL- AMWAL
A partnership in which all the partners invest some capital into
a commercial venture.
For Example:
A, B & C open an automobiles showroom with 500,000
capital from each.

MUSHARAKAH
SHIRKAT-UL- AAMAL
A partnership in which the
partners jointly decide to offer
some services to their customer.
For Example:
A & B open a HR consultancy firm
X, Y & Z open a bridal Parlour Sabs In

MUSHARAKAH
SHIRKAT-UL- WUJOOH
Where the partners have no investment at all,
they purchase commodities on deferred price
by their goodwill and sell them on spot.
For Example:
Arif Habib & Jahangir Siddiqui purchase Rice from the
wholesale market on credit and sale in Clifton on cash.

MUSHARAKAH

All the three are further divided in to two types:

1. SHIRKAT-UL- MUFAWADAH
2. SHIRKAT-UL- AINAN

MUSHARAKAH
SHIRKAT-UL- MUFAWADAH
Where capital, profit, loss and management are
equal among the partners.
SHIRKAT-UL- AINAN
The partners share capital, management, profit,
and risk in an agreed proportion which may not
be equal.
This is the most common type of Shirkah.

Musharaka In Islamic Banks

- Illustration

Islamic Bank

Partner
(customer)

60% ownership

40% ownership

Musharaka

Forms of Musharaka w.r.t Islamic Banks

The Islamic Banks are using Musharaka in two forms namely:
Permanent Musharaka
Diminishing Musharaka

Forms of Musharaka
Permanent Musharaka
is the conventional form
of partnership.

Flow of Musharaka transaction (For Banks)

Subscription of certificates

Musharaka financing
1.The bank issues Musharaka certificates to the
general public. Profit sharing ratio is stated in
the certificates along with other terms and
conditions.
2.General public subscribe the Musharaka
certificate to earn halal return from their
investment.
3.Financing obtained is invested in industrial
projects to generate funds and provide return
to the certificate holders.
4.Profit are accrued and received from projects.
5.Sharing of profits between bank and
certificate holders.

Project

Investors

Bank

4
5

Profit accrued

Forms of Musharaka
Diminishing Musharaka
It is a form of partnership in which
one of the partners promises to buy
the equity share of the other partner
gradually until the title to the equity
is completely transferred to him.

Diminishing Musharaka

Joint
Owner
BANK

ship
Rent
CUSTOMER
Mushar
aka
The customer approaches the Bank with the request
for Project/Machinery/House financing
The Bank enters into a Musharakah (Joint Ownership)
agreement with the customer and both of them pay their
respective shares to the seller of the asset.
Customer pays rent for the use of banks share in the
property

Diminishing Musharaka

BANK

Joint
Owner
Gradual Transfer
ship of Ownership
Mushar
aka

CUSTOMER

The value of Banks share in Musharakah property is divided

into units, which it sells to the customer. Ownership of the
asset is gradually transferred to the customer upon payment
of asset price.
Units will be worked out by dividing Banks financed amount
by number of months for which finance to be allowed.
With each purchase of unit by the customer, the Banks
share in the Musharakah property starts diminishing,
whereas customers share starts increasing,
correspondingly.
Finally, the customer becomes the sole owner of the property
after having purchased all units from the Bank, along with

Basic Rules
Capital
In Musharaka, the capital should be
specific, existent and under disposal.
It is invalid to establish a Musharaka
on non-existent fund or debt.

Basic Rules
Profit sharing ratio of sleeping
partner
The ratio of sleeping partner in profit
should not exceed the ratio that his
investment bears to the total capital
of partnership.

Basic Rules
Fixation of remuneration
It is not permitted, in a Musharaka
contract, to specify a fixed
remuneration for a partner who
contributes in managing the
Musharaka funds or provides some
form of other services, such as
accounting.
However,
it
is
permissible to give him a greater
share of profit than he would receive
solely on the basis of his share in
the partnership capital.

MUSHARAKAH
ILLUSTRATION
1. If A and B enter into a partnership and it is agreed
between them that A shall be given Rs. 10,000/per month as his share in the profit, and the rest
will go to B, the partnership is invalid.
2. Similarly, if it is agreed between them that A will
get 15% of his investment of profit, the contract is
void.
. The correct basis for profit distribution would be
an

agreed

percentages

of

the

actual

profit

Any Questions??
THANK YOU