OTHER ISLAMIC

FINANCING METHOD
CHAPTER 10

EQUITY-BASED FINANCING METHOD

Mudharabah

Musyarakah

Less popular, however suitable for community building and

risk sharing.

Give opportunities to entrepreneur to lower their start up

and business cost.

Entrepreneur and Financier work together to get their

portion of profits from the venture.

Bank get their returns based on the ventures which they

are also take part.

MUDHARABAH EQUITY FINANCING

Customer gets financing of RM20,000 from the bank. The

PSR is 30:70 (30% Bank and 70% customer).

Customer set up the business and manages its operations.

If there is a net profit of RM1,000, then 30% (RM300) will

go to the bank and 70% (RM700) will go to customer.

In the event of loss, example RM2,000, the bank is solely

responsible for the loss.

MUDHARABAH

MUSYARAKAH

Musyarakah Financing is a partnership contract between two

or more individuals or bodies, each contributing capital and
profit or losses are shared between the partners.

The necessary conditions of Musyarakah:

1)

Each shareholder has the right to run the project.

2)

Profit sharing ratio is pre-agreed upon execution of contract.

3)

The capital must comprise assets which is either money or

goods that can be valued in terms of money.

4)

The capital will be mixed together and will be jointly owned by

the shareholders without differentiating ownership of capital.

5)

Work carried out by shareholders must be valued individually

and can be taken into account when dividing profits.

MUSYARAKAH
6)

The shareholding or amount of capital contributed need not be equal

among the shareholders.

7)

Individual share is terminated

Musyarakah, insanity or death.

8)

Profit sharing is according to ratio agreed upon execution of

contract.

9)

Loss sharing, except for those caused by deceit or negligence is

according to percentage shareholdings.

upon

withdrawing

from

the

10) A

shareholder may hand over running of the business to another

shareholder or shareholders.

11) The

shareholders entrusted to run Musyarakah project is given a free

hand to run the project except he must avoid matters that will raise
doubts of the other shareholders.

12) All

Musyarakah project must be halal projects.

13) Each

shareholder is entitled to transfer his share to other parties.

MUSYARAKAH EQUITY FINANCING

Bank and customer agree to contribute RM50,000 each to a JV

project. PSR is 60:40.

Customer shall manage the project.

If the business make a profit of RM10,000. These will be shared

RM6,000 (60%) to customer and RM4,000 to bank.

If there is loss, for example RM10,000. The loss will be shared 5050, thus RM5,000 each customer and bank.

MUSYARAKAH

Features
Capital

Mudharabah
Musyarakah
Comes solely from the bank. Bank contribute 100% of A portion comes from the bank and he balance
the capital.
comes from customer. Example a ratio of 70:30
Whereby 70% capital contributed by bank and 30% by
customer.

Management
of the
business.
Profits

Only customer manage the business.

Both bank and customer take part in managing the

business.

Profits are shared according to a pre-agreed profit

sharing ratio (PSR). The ratio is generally tilted in
favour of the bank because it is the sole capital
provider.
The bank absorbs all losses unless customer is found
to be negligent.

Profits are shared according to a PSR. The ratio is

generally tileted in favour of the more active
partner, who is normally the entrepreneur.

Losses

Liability

Losses are apportioned according to each partners

capital contribution or to a pre-agreed ratio.

The banks liability is limited to the capital provided Each partner has unlimited liability.
unless it has given authority to customer to incur
debt on its behalf.

Ownership of The assets are owned solely by the bank.

assets

Ownership is apportioned according to each

partners capital contribution. Each partners assets
can rise or fall in value due to market forces.

Liquidation of Either party can withdraw from the business anytime Either party can withdraw from the business anytime
assets
it deems fit.
it deems fit.

DIMINISHING MUSYARAKAH (MUSYARAKAH

MUTANAQISAH)

Customer goes to bank to seek financing for their business. Customer and bank agreed
to jointly contribute capital to a business project, i.e. buying a store.

The store is purchased and customer manages its operations while the bank oversees
the accounting system. They share specific responsibilities as stated in the contract.

Profits are shared on a PSR. Customer agreed to transfer her share of profits to the
bank and thereby gradually diminishing the banks ownership of the store.

Losses are shared in proportion to their capital contributions. This brings down the
value of the asset while keeping their respective shares in the store unchanged.

Once the banks ownership share has been redeemed, the ownership of the property
is transferred to customer.

DIMINISHING MUSYARAKAH (MUSYARAKAH

MUTANAQISAH)

Customer identifies a home he wishes to buy and obtains price and other
relevant details.

Customer approaches a bank and arranged for diminishing musyarakah, whereby

he agrees to pay regular rental and capital payments to the bank.

Customer contributes 20% and the bank 80%.

Customers pay monthly instalment = Rental + Ownership redemption of home

share.

The periodic rental amount is shared between customer and the bank on
percentage shareholding. Customers ownership and rental increase over time
when customer redeemed more of banks capital portion.

Ownership of the home is transferred to customer upon complete payment of

all rentals and capital redemptions.