MUSHARAKA – Equity Financing

Key points
01 Introduction

02 Types of Musharaka

03 Basic rules

04 Application in Islamic banks

Musharaka Illustration

Partner A Partner B

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.
MUSHARAKA
FROM HADITHS
MUSHARAKA
It has been divided into two kinds:
SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a particular
property/asset with or without any commercial intention.

SHIRKAT-UL-AQD
Joint commercial enterprise of two or more persons in a
particular venture with commercial intention.
Types of SHIRKAH SHIRKAH

SHIRKAT-UL-MILK SHIRKAT-UL-AQD

IKHTIARI GAIR IKHTIARI

(Optional) (Mandatory)

SHIRKAT- SHIRKAT- SHIRKAT-

UL-AMWAL UL-AAMAL UL-WUJOOH

Shairkat-ul-Mufawada Shirkat-ul-Inan
50:50 40:60
MUSHARAKA
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
MUSHARAKA

• SHIRKAT-UL-AQD
This kind of Shirkah is divided into three types:
a. Shirkat Ul Amwal (Partnership in Capital)
b. Shirkat Ul Aamal (Partnership in Services)
c. Shirkat Ul Wujooh (Partnership in Goodwill)
MUSHARAKA

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.
Shares holders of a company.
MUSHARAKA
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”

MUSHARAKA
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
whole sale market on credit and sale in Clifton on cash.
MUSHARAKA

All the three are further divided in to two types:

1.SHIRKAT-UL- MUFAWADAH
2.SHIRKAT-UL- AINAN
MUSHARAKA
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.
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 t
he 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.
MUSHARAKA
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 as profit, the contract is void.
The correct basis for profit distribution would be an agreed
percentages of the actual profit whatsoever.
MUSHARAKA in Islamic Banks Illustration
Islamic Bank Partner
(customer)

60% ownership 40% ownership

Musharaka
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
Ownership
BANK Rent CUSTOMER
Musharakaha

 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/asset
Diminishing MUSHARAKA
Joint
Ownership
BANK Gradual Transfer of Ownership CUSTOMER
Musharakaha
 The value of Bank’s 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 Bank’s financed amount by number of months for which
finance to be allowed.

 With each purchase of unit by the customer, the Bank’s share in the Musharakah property
starts diminishing, whereas customer’s share starts increasing, correspondingly.

 Finally, the customer becomes the sole owner of the property after having purchased all
units from the Bank, along with the rentals thereon.
Any Questions??