Musharaka

The term “Musharaka” have been derived from Arabic words “Shirkat” and “Sharikat”. The word shirkat or sharikat means partnership of sharing. Thus the word “Musharaka” mean a partnership established between two or more partners for purpose of a commercial venture participated both in the capital and management. Where the profit may be shared between the partners as per agreed upon ratio and the loss, if any incurred, is to be borne by the partners as per capital/equity ratio.

In case of investment through Bank, “Musharaka” means a partnership between the Bank and the Client for a particular business in which both the Bank and the client provide capital at an agreed upon ratio and manage the business jointly, share the profit as per agreed upon ratio and bear the loss, if any, in proportion to their respective equity.

Types of Musharaka

Musharaka, in the context of Islamic modes of financing, may be of two types:

1. Permanent Musharaka: In this type of Musharaka the period for termination of contract is not specified. Thus it is also called continued Musharaka. Though this type of Musharaka is intended to continue up to the dissolution of the enterprise/company, but one can sell his/her share of equity before dissolution.

2. Diminishing Musharaka: In this type of Musharaka the share of capital or ownership to the assets/property of the Bank gradually reduces and goes to the account of the Client with the payment of share value by the Client in addition to share in profit as per agreement.

Important features

01.

Bank and client both supply capital unequally/equally.

02.

Profit is divided as per agreement and actual loss is divided as per equity.

03.

Client will maintain all accounts properly and the bank or its agent may verify or audit it.

04.

Banks can advice the client or take part in the management of the Business.

Compensation

Musharaka agreement may include a clause to the effect that if any partner violates any rules of Musharaka or any terms & conditions of Musharaka agreement, the other partners will have the right to impose compensation on him/her as determined by the review Committee of the Bank.