ACCOUNTING FOR

MUSHARAKAH FINANCING

Principles of Musharakah Financing

It is a form of partnership between Islamic Bank and
entrepreneur.
Current permutations of shirkah include joint asset
ownership and asset management arrangements.
Modern applications of shirkah in Islamic finance extend
to banking, asset management, capital markets and
insurance (for example, banking deposits and financing,
investment funds, sukuk, and takaful)
Each party will contribute to equal or varies amount of
capital.
If the business are gained profit, it is shared according to
pre agreed ratio.
If it is loss, it will be shared according to capital
contribution ratio.

Principles of Musharakah
Financing

Principles of Musharakah
Financing
Capital of
Agency

Termination
of
Musharakah

Condition
for
Musharaka
h
The fixing of the
ratio of profit
sharing

The Profit
sharing must
be in ratio

Principles of Musharakah
Financing

Constant
Musharakah

Musharakah
Mutanaqisah
(Diminishing
Partnership)

Principles of Musharakah
Financing
Constant Musharakah
Islamic bank enters into a partnership with
entrepreneur(s) to invest in a feasible business
project

Diminishing Musharakah
- capital is not permanent
- every repayment of capital by the entrepreneur
will diminish the total capital ratio for the
capital provider.
- This will increase the total capital ratio for the
entrepreneur until the entrepreneur becomes
the sole proprietor for the business.

Source : bnm

Accounting recognition
Financing for customers
Dr. Musyarakah Financing Account
Cr. Cash
Repayment by customers
Dr. Cash
Cr. Musyarakah Financing Account
Profit received from Musyarakah Financing
Dr. Cash
Cr. Profit and Loss Account

Accounting for Musharakah

Financing - AAOIFI

EXAMPLE

EXERCISE 1
Syed Bukhari enters into a Musharakah Mutanaqisah contract with As-Siddique Islamic Bank on a
project to build science laboratories for government schools. Syed Bukhari puts in RM200,000
capital while the bank offered to cover remaining expenditure amounting RM800,000. Profit and
loss sharing ratio as agreed by both parties is 70:30 (bank: customer) at the beginning of the
contract. Siddique Islamic Bank and Syed Bukhari
have also agreed for the profit sharing ratio to
change to 80:20 (bank: customer) for year 3 onwards. In the contract, it is agreed that Syed
Bukhari is required to pay back Siddique Islamic Bank in 5 equal installments yearly. However, Syed
Bukhari had financial difficulties during year 3 and thus only managed to pay 70 percent of the
agreed repayment amount. Half of the outstanding amount in year 3 will be paid in year 4 and the
balance will be paid in the next following year. The profits or losses from the project are as follows:

Year
1
2
3
4
5

Profit / (Loss)
(RM)
100,000
(50,000)
20,000
(10,000)
125,000

Prepare journal entries in the account of Siddique Islamic Bank for the above transaction based
on accrual basis recognition method.