Musharakah

 Introduction of Musharakah.
 Types of Shirkah.
 Management of Musharakah
 Musharakah as Mode of Financing.
 Diminishing Musharakah

 Termination of Musharakah
 Difference between Interest Based Financing and
Musharakah.
 Musharakah means ‘sharing.’ The root of the word is
Shirkah, which means ‘being a partner.’ Under Islamic
law, Musharakah is a joint enterprise, formed for
conducting business, in which all partners share the
profit according to a specified ratio, while the loss is
shared according to the ratio of the contribution.
 Reported by Abi Hurairah R.A that the Prophet S.A.W
said “Allah had said that: “I am the third of the partners,
as long as any one of them does not betray the other. If
he/she does betray the other, I will withdraw (move
away) from them”
 Reported by As–Saib Al–Makhzumi R.A that he used to
be a partner of the Prophet S.A.W (in business) before
his Prophet-hood. During the opening of Mecca he said
to the Prophet S.A.W: “Welcome my brother and
partner!”
 Shirkah

Shirkat-ul-Milk (ownership Shirkat-ul-Aqd

partnership) (contractual partner)

Optional Shirkat-ul-Milk
(Ikhtiari) Shirkat-ul-Amwal
(Capital)Partnership in
trade
Compulsory Shirkat-ul-Milk
(Ghair Iktiari) Shirkat-ul-Aamal
(Labour)Partnership in
Services

Shirkat-ul-Wujooh (Good
Musharakah will/Credit)Partnership
in Good will
 “Joint ownership of two or more
persons in a particular property.”
It means joint ownership of two or more persons
in a particular property.
This kind of “Shirkah” may come into existence in
two different ways:
>Optional Shirkat-ul-Milk (Ikhtiari)
>Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)
If two or more person purchase an equipment, it will
be owned jointly by both of them and the relationship
between them with regard to that property is called
“Shirkat-ul-milk.”
Here this relationship has come into existence at
their own option, as they themselves elected to
purchase the equipment jointly.
 There are cases where this kind of “Shirkah”
comes to operate automatically without any action
taken by the parties.
For example, after the death of a person, all his heirs
inherit his property which comes into their joint ownership
as an automatic consequence of the death of that
person.
 “A partnership effected by a mutual
contract in which the partners join together
with different contributions, work or
obligation for the purpose of earning profit”.
“Joint commercial enterprise.”
Shirkat-ul-‘aqd is further divided into three
kinds:
1. Shirkat-ul-amwal (Partnership in Trade “Capital”)
2. Shirkat-ul-A’mal (Partnership in Services “Labour”)
3. Shirkat-ul-wujooh (Partnership in Goodwill)
Shirkat-ul-Amwal (Partnership in Trade “Capital”)
“Where all the partners invest some Capital
into a Commercial enterprise.”
It is the most important & commonly used form
of Shirkat
Shirkat-ul-Aamal (Partnership in Services
“Labour”)
“Where all the partners jointly undertake to provide
some services for their customers”.
 The fee charged from them is distributed among them
according to an agreed ratio.
 If two persons agree to undertake tailoring services for
their customers on the condition that the wages so earned
will go to a joint pool which shall be distributed between
them irrespective of the size of work each partner has
actually done.
Shirkat-ul-wujooh (Partnership in Goodwill)
“The word Wujooh comes from Wajahat meaning
goodwill” Hence this is a partnership in Goodwill.
 Here the partners contribute in the business not through
capital but through their goodwill and share profit at an
agreed ratio
 All they do is that they purchase the commodities on a
deferred(not on time) price and sell them at spot. The
profit so earned is distributed between them at an agreed
ratio.
All these modes of “Sharing” or partnership are termed as
“Shirkah” in the terminology of Islamic Fiqh, while the
term “Musharakah” is not found in the books of Fiqh.
The term Musharakah has been introduced recently by those
who have written on the subject of Islamic modes of
financing
It is normally restricted to a particular type of “Shirkah”. That
is, the Shirkat-ul-amwal, where two or more persons invest
some of their capital in a joint commercial venture.
However, sometimes it includes Shirkat-ul-a’mal also where
partnership takes place in the business of services
 Musharakah means relationship established under a
contract by the mutual consent of the parties for sharing of
profits and losses, arising from a joint enterprise or
venture.

 Investments come from all partners / shareholders

hereinafter referred to as partners.

 Profits shall be distributed in the proportion mutually

agreed in the contract.
- Each partner has a right to take part in Musharakah
management.
- The partners may appoint a managing partner by mutual
consent(Agreement).
- One or more of the partners may decide not to work for the
Musharakah and work as a sleeping partner.
- If one or more partners choose to become non-working or
silent partners. The ratio of their profit cannot exceed the
ratio which their capital investment bears so the total
capital investment in Musharakah.
 80% shares in Joint
Ownership

60% shares reduce

by selling shares Diminishing
40% shares reduce Musharakah
by selling shares

20% shares reduce

by selling shares

All shares in Financer (B) received

joint ownership share price in the form
sell out to Client of rent from Client A.
Client (A) A.
Financer (B)

Client A is Sole
proprietor Is a type of Partnership (Shirkah) whereas one
80% shares increase by Partner (Client A) purchasing the other Partner
purchasing shares (Financer B) Shares gradually.
60% shares increase by
purchasing shares
-To create joint ownership in the property
40% shares increase by
purchasing shares
(Shirkat-ul-Milk).
-Giving the share of the financier to the client on
20% shares in joint
ownership
rent.
Property sell
on (Client A &
-Promise from the client to purchase the units of
Financer B) share of the financier.
-Actual purchase of the units at different stages.
 In interest base financing, the
financer predetermines a fixed rate
of return on loan.
 Financier can not be suffer loss.
 Profit and loss, creditor may use
high profit margin as compare to
society.
In Musharkah, the return is based on
the actual profit earned by the joint
venture.
The financer can suffer loss.
In this system, all the partners share
the profit according to specified ratio,
while the loss is share according to the
ration of contribution or investment.
 Profit of the most of the business contracts in Islamic
banking are determined on the basis of interest
rate(KIBOR or LIBOR) as benchmark which is one of
the major criticism against Islamic banking.
 In the above studies, noted that proposed models
resultants much profitable.
 The study recommend that the proposed models best
alternative to interest rate benchmarking for setting
the profit rate.
 Different Alternatives for Islamic banks are proposed to
determine their profit rate.
Ghazali(1994) “Rate of Dividend of Islamic banks Deposits
and Investment Account model”
Usmani(2007) “The creation of an inter Islamic bank Market
based on Islamic Principles”
Hassan(2009) “A benchmark that can fit both Islamic &
Conventional banks”.
Another idea “Islamic Interbank Benchmark Rate (IIBR)” was
given by a group of 16 banks working with Industry
Associations and data provider Thomson Reuters.
 Islamic Banks use interest rate as bench mark in sale
(Murabaha) and rent (Ijarah & Diminishing Musharakah)
based on financing modes.
Profit and rent is set keeping in view the ongoing market
interest rate.
Difference of Opinions:
Usmani 2007 claim that using an interest rate benchmark
for determining profit of permissible transaction is not
prohibited(Haram).
Usmani2007 adds that even though this measure is
permissible but not desirable and Islamic banks as well as
other financial institutions should leave this process as soon
as process.
Islamic Interbank Benchmark Rate IIBR:
According to this model, the idea was to collect the different
rates the Islamic branches of conventional banks were
offering and set a rate through a mechanism known as
“fixing”,
i.e. To remove the top and the bottom rates and then
taking an average of the middle 8 rates and setting that as
final rate for the Islamic banks.
 Diminishing Musharakah Model
- Joint ownership between bank and client.
- Bank purchases the property on behalf of Musharakah. While client
takes the property on lease from the bank.
- The Property generates rental income for the bank where rents is
usually determined around KIBOR.
- The share of the bank usually divided into different number of units
which the client purchases periodically. When shares transfer
completed, bank transfers the ownership to client.
 Proposed Model
- Bank and Client 5years contract.
- Client pay rent (80% and additional amount for transfer of
shares.
- End of each year, The property’s value will be reassessed
and new rent as well as additional amount will be redefined
according to reassessed value.
- Rate of Rent/Profit of the bank in this cases is decided
using market prices(house prices & rental data) as
benchmark.