Islamic Financial Product

Musharka
(Equity Participation)
or
Venture Financing
 Introduction
 Musharka or Shirkah can be
defined as a form of partnership
where two or more persons
combine either their capital or
labor together to share the profits
& enjoying similar rights and
liabilities.
 A contract between two or more
persons who launch a business or
financial enterprise to make profit.
 Condition of Musharka
 Musharka is a technique of
financing used as a partnership.
 Two or more parties provide finance
for a project.
 All partners are entitled to a share
in the profits resulting from the
project in a ratio which is mutually
agreed upon.
 In case of loss it is shared exactly
in the proportion of capital.
 All partners have a right to
participate in managing the
project.
 Any one can waive the right of
participation in favor of partner
or partners.
Historical Background Musharka
 From the beginning of human society
methods to meet day to day needs have
been changing with the change of social,
economic, scientific, cultural and political
circumstances.
 Especially habits, fashions and the
standard of living.
 These methods regulate the commercial
activities and vary from place to place and
time to time.
 The Arab society at the time of the
rise of Islam had very simple
financing methods and forms of
business peculiar to that society
 Birth of Islam saw Musharka
practice in Arabia in commercial
activities.
 Islam endorse and Prophet May
Peace be upon Him perform
business on the basis of Musharka.
 After Hijra Muhajireen and Ansar
were declared by Prophet May Peace
be upon Him to be brothers.
 Subsequently they joined as
partners on Musharka, Muzara and
Mussaqa form trade and commerce.
 Nature of transactions in the
different forms were identical.
 These forms were so developed that
they became independent
institutions.
 Jurists formed detailed rules about
the form.
 There is a consensus of opinion
among the jurists of all schools- of
thought that Musharka is a valid and
legitimate contract in Islam.
 The jurists, however differ over its
form conditions and other details
 Two main forms of Musharka
Permanent Musharka
 In this form the parties of Musharka
participates in the equity of a project or
transaction and receives a share of profit
on a pro rata basis.
 The period of contract is not specified.
 It can continue so long as the will of the
parties.
 This technique suits for long terms
projects as funds and development are
committed and protracted.
 Diminishing Musharka –
 It allows equity participation on a pro-rata
basis
 System by which equity of parties keeps
on reducing ultimately the ownership of
the asset on any one or more participants
is transfers.
 Partners gets dividend on their equity and
if any of the partner sell or buy other
partner some of its equity, it is allowed to
do so.
 Equity held by partner progressively
reduced and at a certain time equity
held by any partner reach to ZERO.
 Disposal of total equity an end of
Musharka
 Musharka form of financing is being
used by Islamic banks to finance
Project Financing and Working
Capital.
 Types of Musharka
Shirkah -Al-Milk (non-contractual)
It involve co-ownership and form when two or
more persons get joint-ownership of some asset
without a formal partnership agreement.
Example

 Two persons receiving an inheritance or a gift

of property which mayor may not be divisible.
 Partners have to share property or its income in
accordance with their share until they decide to
divide.
 If the property is divisible and partners
still decide to stick together, It is Shirkah
al-Milk Ikhtiyariyyah (voluntary).
 If it is indivisible and they are forced to
stay together it is characterized as
Jabriyyah (involuntary).

 It is a proper partnership as the parties

concerned willingly entered into a
contractual agreement for joint investment
and the sharing of profits and risks
 Shirkah al-Uqood (contractual partnership)
.
 The agreement need not necessarily
be formal and written, it could be
informal and oral.
 Just as in Modaraba, the profits can
be shared in any equitably agreed
proportion.
 Losses must, however, be shared in
proportion to the capital contribution.
 Type of Al-Uqood
In Fiqh Shirkah al-Uqood divided into
four kinds:
 Al-Mufawadah (full authority & obligation)
 Al-Inan (restricted authority & obligation)
 Al-Abdan (labor, skill and management)
 Al-Wujuh (goodwill, credit-worthiness and
 Mufawadah
 In Mufawadah partners are adults,
 equal in their capital contribution,
 their ability to undertake
responsibility and their share of
profits and losses.
 They have full authority to act on
behalf of the others
 jointly and severally responsible
for the liabilities of their
partnership business, provided
that such liabilities have been
incurred in the ordinary course
of business.
 Each partner can act as an agent
(Wakil) for the partnership
business and stand as surety or
guarantor (Kafil) for the other
partners
 Inan
 Inan involve all partners need not be adults
or have an equal share in the capital.
 They are not equally responsible for the
management of the business.
 Their share in profits may be unequal, but
this must be clearly specified in the
partnership contract.
 Their share in losses would be in
accordance with their capital
contributions.
 Shirkah Al-Inan the partners act as agents
but not as sureties for their colleagues.
 Shirkah Al-Abdan
 Shirkah al-Abdan is where the partners
contribute their skills and efforts to the
management of the business without
contributing to the capital.
 They use their expertise, experience and
goodwill that give confidence and strength
to the venture either on profit or wages..
 Shirkah Al-Wujuh
 Partners use their goodwill, their credit-worthiness and
their contacts for promoting their business without
contributing to the capital.
 Both these forms for partnership, where the partners
do not contribute any capital, would remain confined
essentially to small-scale businesses only.

These are of course models. In practice, however, the

partners may contribute not only finance but also
labor, management and skills, and credit and goodwill,
although not necessarily equally
 Introduction & Back ground
 Dilemma in this modern world for entrepreneur
is his capability to initiate his idea for a new
business.
 He look to raise equity, capital or financing to
enter business venture.
 Firstly loan need collaterals arrangements,
keeping in mind the impossibility.
 Secondly borrowing that is made for the
purpose is subject to the cost to be paid in
shape of interest ranges to 6% to 20% or more.
 Thirdly cost to be paid on loan has to be
determine on the volume of risk and success.
 If interest rate is 6% but the venture has a 10%
chance of failing within a year, the lender will
probably charge interest at a rate of 16%.
 High interest on compounding impose heavy
costs on the venture from the start.
 It increase the danger of failure and rise
interest rate. If venture's prospects can not be
predicted with confidence, it is difficult to
calculate an appropriate interest rate.
 Alternative for entrepreneur is admit a
partner to the business who is entitled to
receive a portion of profits from the
venture in exchange for contributing
capital.
 The partner's contribution and
participation is pre determined.
 There is no need to compute an interest
rate and there are no fixed costs of debt.
 The partner will receive profits only if
earned
 Islamic Perspective
 Islam stress on the socio economic
development that tie individuals with
brotherhood and care like members of
one single family.
 This brotherhood is universal and not
narrow-minded.
 It is not tie by any geographical
boundaries and take whole of mankind
group, tribe or race into one relation and
that is universal partners for better
earth.
 The concept of brotherhood and equal treatment in
society and before the law is not meaningful unless
accompanied by economic justice.
 Receiving dues for individual who contribute to
economic activity in society or to the social product
without any kind of exploitation of one by another.
 The Prophet May Peace Be Upon Him warned:

"Beware of injustice for injustice will be equivalent to

darkness on the Day of judgment".

 This warning is against injustice and exploitation and

to protect the rights of all individuals whether
consumers, producers, distributors, employers or
employees with aim to promote welfare and ultimate
goal of Islam.
 Special significance is given to the
relationship between the employer and the
employee which Islam places in a proper
setting and specifies norms for the mutual
treatment of both so as to establish justice
between them.
 An employee is entitled to a "just" wage for
his contribution to output and it is
unlawful for the employer to exploit his
employee.
 In case is with trader and consumer the
dealing fair and transparent.
Modern Musharka and its Conditions
The modern business concerns being run on the
basis of Musharka
 Partnership: It is regulated by Partnership: It
is regulated by-
3. Partnership rules framed by the government,
4. Business practices prevailing in the business
community.
 Limited Company
This type of Musharka is strictly
controlled by the statutory rules
framed by the government Its
commercial activities are,
however, influenced by the
business practices.
 Co-operative societies
This Musharka is also governed by
statutory rules.
Its commercial activities are
influenced by the practices
prevailing in the business
community.
 The modern Musharka principally resembles
Shirkah al-Inan. The details are, however,
considerably different due to change of Urf and
other factors including modem commercial
techniques, economic conditions and legal
requirements.
Let us discuss briefly the conditions of Musharka,
which are those of Shirkah al-Inan. Other types
of Musharka mentioned by jurists are nearly
obsolete nowadays.
 Capital invested by partners may be
unequal.
 Majority of jurists, capital should be in
shape of currency and not the goods.
 Condition for capital in form of currency
was imposed when it was difficult to refer
goods in terms of currency.
 In barter systems jurists framed the rules,
now goods are generally referred or
accounted for in terms of currency.
 This condition is waived in limited
companies and co-operative societies as
the capital is invested in the form of equal
units of currency called shares and the
intended partners buy as many shares as
they wish.
 This practice has universally been
accepted as urf and is therefore according
to Islamic principles.