Islamic Financial

Products and Processes

Dr. Ameenullah Aman

ameenullahaman.s@gmail.com
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 • SHIRKAT-UL-AQD

• IKHTIARI • GAIR IKHTIARI

(Optional) (Mandatory)

• SHIRKAT- • SHIRKAT- • SHIRKAT-

UL-AMWAL UL-AAMAL UL-WUJOOH

• Shairkat-ul-Mufawada • 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.
 Shares holders of a company.
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
1 2
conditions.
2.General public subscribe the Musharaka
certificate to earn halal return from their Project

investment. 3
Investors Bank
3.Financing obtained is invested in industrial
projects to generate funds and provide return
to the certificate holders. 4
4.Profit are accrued and received from projects. 5
5
5.Sharing of profits between bank and
certificate holders.

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
• BANK Ownersh • CUSTOMER
• Rent
ip
• Musharak
a
 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

• Joint
Ownersh
• BANK • ip of Ownership
Gradual Transfer • CUSTOMER
• Musharak
a
 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
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