wk6. Mush-I

8/11/2014 1 Islamic Finance. Dr .
Zohra Jabeen
Musharakah Finance
Islamic Finance
Table of Contents
Concept & Definition
Musharakah in Quran and Hadith
Pillars of Musharaka
Process flow diagram of Musharakah
Kinds of Musharakah
Basic Rules & Feathures
Distribution of profit & loss
Termination
Musharakah in Islamic Banking
Islamic Finance Presentation
8/11/2014 3 Islamic Finance. Dr . Zohra Jabeen
Musharakah
Musharakah Arabic origin word.
literally means sharing
derived from Shirkah which means being a
partner.
In the context of business and trade it means a
joint enterprise in which all the partners share
the profit or loss of the joint venture
It is an islamic mode of financing and alternative
to interest-based financing or banking.

The Concept of Musharaka

Musharaka is a joint venture partnership
where by two (or more) parties contribute to
the capital and participate in the management
to execute a potentially successful project
with the purpose of earning halal profit, which
will be shared among the partners.
Musharakah in Quran and Hadith
Allah has declared

that He will become a partner in a business
between two Musharik (partners) so long as
they do not indulge in cheating or breach of
trust (Khiyanah).

Hadith:

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

PILLARS OF MUSHARAKAH
1. Shuraka
Shareholders
2. Rasul Mal
Capital
3. Mashru
Project or business venture
4. Ribh
Pre-determined profit allocation
5. Sighah
Ijab (Offer)
Qabul (Acceptance )

Processflow
Rasul-Mal
(Capital)
Mashru
(Project)
Shuraka
(Shareholders)
Shuraka
(Shareholder)
Ribh
(Predeter
mined
profit
rate)
Ijab & Qabul
Profit/Loss
Profit/Loss
Kinds of Musharakah
SHIRKAH (Partnership)
Shirkat-ul-Milk (Joint ownership)
By Choice Without Choice
Shirkat-ul-A'qd (Business partnership)
A'amal (partnership in work) Wujooh (reputational partnership) Amwaal (partnership with capital)
Kinds of Musharakah
Shirkat ul-milk (partnership of ownership): 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.
1. By the partners choice: means coming into the
operation at the option of the parties. For example, if
two partners agree to buy equipment it will be owned
jointly by both of them.
2. Without the partners choice: means coming into the
operation automatically without any action taken by
the parties. For example, if property is inherited.

Cont
Shirakal al-aqd (partnership of a contract):
means a partnership through a mutual contract.
This kind of Shirkah exists in three types:
1. Shirkal ul-amwal (financial company): all the
partners invest some capital into a commercial
enterprise.
2. Shirkat ul-amal (company of workmanship): all the
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.

Cont
3. Shirkal ul-wujooh:
Wujooh refers to goodwill, creditworthiness, and good
reputation.
Creditworthiness and reputation as a form of wealth
Partnership upon credit is where two persons who do not
contribute any property, become partners by agreeing to
purchase goods jointly upon their personal credit (without
immediately paying the price) and to sell them on their joint
account.

Cont
Both partners do not contribute any capital. They purchase
commodities at a deferred price and sell them for cash.
Partner may equally share the profit. It is also possible that
one of the partners may own a greater share of the goods
than the others based on an agreed ratio.
Rules of Musharaka
Management of Musharaka
Each partner has a right to take part in Musharaka
management.
The partners may appoint a managing partner by
mutual consent
One or more of the partners may decide not to work
for the Musharaka and work as a sleeping partner.
The basic rules and Features of Musharakah

Investments come from all partners/shareholders
hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually
agreed in the contract.

The basic rules and Features of Musharakah

The existence of Mutaaqideen(Partners):
Capability of Partners: Must be sane & mature and
be able of entering into a contract.
The contract must take place with free consent of
the parties without any fraud or misrepresentation.
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.
Cont
It is not allowed to fix a lump sum amount for any of
the partners,or any rate of profit tied up with his
capital.
A management fee however, can be paid to the
partner managing the Musharakah provided the
agreement for the payment of such fee is
independent of the Musharakah agreement.
Losses are shared by all partners in proportion to
their capital.

Cont
All assets of Musharakah are jointly owned in
proportion to the capital of each partner.
All partners must contribute their capital in terms of
money or species at an agreed valuation.
The presence of the commodity: This means the
price and commodity itself.
Cont
The rate of profit sharing should be determined: The
share of each partner in the profit earned should be
identified at the time of the contract. If however, the
ratio is not determined before hand the contract
becomes void (Fasid).
Therefore identifying the profit share is necessary.


The proportion of profit to be distribution
among the partners must be determined and
agreed upon at the time of contract.
Otherwise the contract is not consider valid
under shariah.

Distribution of Profit
ILLUSTRATION
If A and B enter into a partnership and it is agreed
between them that A shall be given Rs. 10,000/-
per month as his share in the profit, and the rest
will go to B, the partnership is invalid. Similarly, if
it is agreed between them that A will get 15% of
his investment, the contract is not valid. The
correct basis for distribution would be an agreed
percentages of the actual profit accrued to the
business.
Islamic jurist views
According to Imam Malik and Imam shafi, it is
necessary that each partner's share the profit
is exactly equal to the proportion of initial
investment into the partnership

according to the Imam Ahmad, the ratio of
profit distribution may vary without restriction
from the ratio of investment.


According to the Imam Abu Hanifah, the ratio
of profit distribution may vary. However for
silent partner (non active member who only
contribute capital ).it can not be any higher
then the ratio of investment.

Sharing of Loss
In the case of loss
each partner shall
suffer the loss exactly
according to the ratio
of his investment. If a
partner has invested
40% of the capital, he
must suffer 40% of the
loss, not more, not
less.
Nature of capital

According to the Imam Malik and
Hambali jurist, the nature of capital is not
a restriction in musharakah arrangement.
Therefore in kind (non cash) contribution
of partners are allowed, which are based
on the market value of the commodity
contributed.


According to the Imam Abu Hanifah and Imam
Ahmad, no in kind contribution are allowed in
musharakah arrangement.

According to the Imam Shafi, makes
distinction between replaceable and
irreplaceable commodities.
The view of Imam Malik has been widely
accepted.
Termination of Musharakah
Termination of Musharakah
Musharakah is deemed to be terminated in any one
of the following events:
(1) Every partner has a right to terminate the
Musharakah at any time after giving his partner a
notice to this effect, whereby the Musharakah
will come to an end.
In this case, if the assets of the musharakah are in
cash form, all of them will be distributed pro rata
between the partners. But if the assets are not
liquidated, the partners may agree either on the
liquidation of the assets, or on their distribution
or partition between the partners as they are.

Cont
IN CASE OF A DISPUTE
If there is a dispute between the partners in this
matter i.e. one partner seeks liquidation while
the other wants partition or distribution of the
non-liquid assets themselves, the latter shall be
preferred, because after the termination of
musharakah, all the assets are in the joint
ownership of the partners, and a co-owner has a
right to seek partition or separation, and no one
can compel him on liquidation. However, if the
assets are such that they cannot be separated or
partitioned, such as machinery, then they shall be
sold and the sale-proceeds shall be distributed.
Cont
(2)If any one of the partners dies during the
musharakah, the contract of musharakah with
him stands terminated. His heirs in this case,
will have the option either to draw the share
of the deceased from the business, or to
continue with the contract of musharakah.
(3)If any one of the partners becomes insane
or otherwise becomes incapable of effecting
commercial transactions, the musharakah
stands terminated.
Cont
If one of the partners wants termination of the
musharakah, while the other partner or partners
like to continue with the business, this purpose
can be achieved by mutual agreement. The
partners who want to run the business may
purchase the share of the partner who wants to
terminate his partnership, because the
termination of musharakah with one partner
does not imply its termination between the other
partners.
Cont
However, in this case, the price of the share of
the leaving partner must be determined by
mutual consent, and if there is a dispute
about the valuation of the share and the
partners do not arrive at an agreed price, the
leaving partner may compel other partners on
the liquidation or on the distribution of the
assets themselves.

Musharaka in Islamic Banks

8/11/2014 Islamic Finance. Dr . Zohra Jabeen 36
Islamic banks in Pakistan
Some of the islamic banks that deal
musharakah financing are as follow.

Mezan Bank
Bank Islami
Al-Baraka Bank

Application of Musharakah in Meezan Bank
Liability side
Meezan Bank has successfully launched Riba Free
Certificates of Islamic Investment (COII) in 2000

Recently Meezan Banks has also introduced
Saving accounts based on Musharakah


Musharakah Sukuk

Musharakah Sukuk are securities in which its
holders are owners of a specified property in
common. Sukukholders will gain (lose) from any
increase (decrease) in the underlying asset
prices. (S.A.Mousavian,2006)

Musharakah Sukuk have a specified maturity
date, and are negotiable in the secondary
market.
Riba Free COII
Product Features
Name: Riba Free Certificate of Islamic Investment.
(COII)
Tenure: 3 month, 6 month, 1 year, 2 years, 3 years
& 5 years
Minimum Investment: Rs. 50,000/-
Profit option: Monthly, Quarterly, at Maturity

Riba Free COII
Basic Concept:

Riba Free COII is a Musharakah-based contract
between Meezan Bank and its customer.
All the principles and rules pertaining to
Musharakah are strictly adhered.
Profit and loss is shared according to the rules of
Islamic Fiqh.

Riba Free COII
Depositor is a partner with the bank in an
investment pool formed as a result of
Musharakah
The Bank acts as an investor as well as a working
partner
Whereas the depositors are investors and
sleeping partners.

Riba Free COII
Profit depends on the return of this pool and is
calculated on a quarterly basis.

Investors share the profit in a pre-agreed ratio

In case of a loss the Investor is liable to share it in
the ratio of investment

Asset Side

On the Asset side Meezan Bank has successfully
used Musharakah for fulfilling the financing
needs of its customers.

Sitara MTFC
Meezan Bank acted as a joint lead manager and
Shariah Advisor in successful issuance of Sitara
Chemical Industries Musharakah Term Finance
Certificates.
The transaction has achieved financial close of Rs
225 million in private placement.

Musharaka Sukuk in Practice
US$550 million sukuk transaction for Emirates
airline, the seven-year deal was a structured on a
Musharaka contract. The Musharaka or joint
venture was set up to develop a new engineering
centre and a new headquarters building on land
situated near Dubai's airport which will ultimately
be leased to Emirates. Profit, in the form of lease
rentals, generated from the Musharaka venture
will be used to pay the periodic distribution on
the trust certificates.

ASKARI HOME MUSHARAKAH
(MUSHARAKAH HOME FINANCE)

Askari Home Musharakah: How it Works?
Joint ownership is created in the property between Bank &
Customer on the basis of the Musharakah Agreement. (This
is bases on the principles of Shirkat ul Milk).
Banks share is divided into units and is given to the client
on rent.
Client promises to purchase Banks share (units) over the
tenure of transaction.
Client purchases the units every month and will eventually
become the owner of the property.
Rental amount will be adjusted according to the banks
share (units) remaining in the property.
Askari Home Musharakah has tailor made solutions to meet
your needs

..
Alhamdolillah!
8/11/2014 Islamic Finance. Dr . Zohra Jabeen 49

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