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7/27/2019 Musharaka Mode of Islamic Banking
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Islamic Mode of Finances
MUSHARAKAH
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Islamic Mode of Finance1. Trade based
a. Musawamahb. Murabaha
c. Ijarah
d. Bai Salam
e. Bai Istisna
2. Sharing Based (Partnership)
a. Musharakah
b. Diminishing Musharakah
c. Mudarabah
3. Debt based
- Qard
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MUSHARIKA Derives from Shirkah Literal Meaning being a
partner
It is used in the same context as the term Shirkmeaning partner to Allah
Under Islamic Jurisprudence, Musharaka means a jointenterprise formed for conducting some business inwhich all partners share the profit according to thedecided ratio while the loss is shared according to the
ratio of the contribution.
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Continues..
Interest determines a fixed rate of return whileReturn in Musharakah is based on actual profit & loss
Interest-bearing transaction Financier cannotsuffer loss
Musharakah transaction - Financier can sufferloss
The partners share capital, management, profit andrisk and every partner is trustee, guarantor, andagent on behalf of the other partner.
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SHIRKAT
Modaraba
(Where one partner invests,
and the other manages)
Musharka(Where all partners invests but
only some of them work eg.
Banks where depositors and
shareholders invest but only
shareholders work).
Conditional(Where the Investor
specifies the business
to the manager eg
which, where etc.)
Unconditional(Where the Investor
gives full authority to
the manager in all
aspects of business.)
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Musharaka
Shirkat-ul-Milk(Joint ownership of two or more
people in a property.)
Shirkat-ul-Aqd(Joint Enterprise by contract)
Where2 or more people
become partners by entering
into a contract.
Optional: When parties opt
to make a partnership. For e.g
Ghair Ikhtiari
(Compulsory)(Where 2 or more people
become partners as an
automatic consequence
eg inheritors after the
death of a family member)
See separate chart
for
Shirkat-ul-Aqd
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SHIRKAT-UL-AQD
Shirkat-ul-Amwal
(Parnership in capital)
Where all partners invest
capital into a
commercial enterpriseand share in profit.
Shirkat-ul-Aamal(Partnership in Services)
Where all partners jointly
undertake to render some services
for their customers and the fee
charged from them is distributed
among them according to an agreed
ratio.
Shirkat-ul-Wujooh(Partnership in goodwill)
Where partners have no investment
at all. All they do is that they
purchase the commodities on a
deferred price and sell them at spot.The profit so earned is distributed
between them at an agreed ratio.
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Basic rules of Musharakah
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All partners must have the contractual
capacity
Each partner has a right to take part inMusharakah management
However, the partners may appoint aManaging Partner by mutual consent. In thiscase the other partners will become sleepingpartners. And will only be entitled to share in
profit in proportion to their investment.
All active partners are treated as agent ofothers in all matters of business.
MANAGEMENT OF MUSHARAKAH:
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Basic rules of capital in
Musharakah
The capital must be:
Quantified (Maloom): How much
Specified: Specified currency Not necessary be merged
Not necessary be in liquid form
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Distribution of profit
The ratio of profit distribution should be agreed at
the time of execution of contract otherwise contractis void.
The ratio should be determined on basis of actual
profit earned by the enterprise.
Not as a percentage of partners investment & Not in
lump sum amount
Active partners profit share can be higher than his /
her proportion of investment
It is not permitted to start the allocation of profit
between partners unless the operating costs,
expenses and taxes are deducted.
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Continues..
Sleeping partners share of profit cannot be
more than his share of capital in the business.
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SHARING OF LOSS
Loss to be shared exactly in ratio of investmentwhile Profit is based on agreement of the parties,
but loss is always subject to the ratio ofinvestment
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Termination of Musharakah
Musharakah will be terminated in following
conditions: Purpose of forming musharakah is achieved. For e.g
musharakah was formed for a certain project and the
project stands completed
Every partner can terminate musharakah by giving a
notice
Musharakah stands terminated if any partner dies or
becomes insane
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Each partner has the right to terminate the
Musharakah at any time after giving prior
notice to other partners How will the assets be distributed in such
case? If the assets are in liquid form, They will be
distributed in proportion of investment If the assets are non-liquid, there are two
scenarios
a) The assets may be liquidated, and theproceeds to be distributedb) The assets may be distributed in theirexisting form after valuation
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Continues.. If the assets cannot be distributed in their
existing form e.g. Machinery; they will be
liquidated and the proceeds to be distributed
as per ratio of investment
If partner A wants termination and partner Bwants continuation, B can continue by
purchasing the shares of A.
A condition in the agreement can be includedwhich require consent of all partners for the
termination of Musharakah
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Dispute resolution
Provision of review committee can be
added to the agreement which will
resolve the difference arising betweenthe partners.
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USES of Musharakah
Asset side Financing: LC with margin
SME set up financing
Machinery financing
Project Financing
Import financing
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Continues..
Liability side financing:
Deposits giving profit on musharakah basis
Islamic musharakah bonds
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