Musharakah (partnership) is one of the most important methods of financing for the operations of collective investment in various economic activities whether industrial, commercial or real estate… It is used effectively in Islamic banks as the latter deals mainly with the concept of participation in profit and loss, and this is a characteristic of Islamic banking.

1. Definition of Musharakah

The word Musharakah is derived from the Arabic word Sharikah meaning partnership.Musharaka is a partnership between two or more parties whereby each partner contributes with a specific amount of money in a manner that gives each one a right to deal in the assets of the partnership, on condition that profit is to be distributed among the partners according to the partnership agreement and losses are to be borne by the partners in accordance with the contribution of each partner to the Musharaka capital.

To sum up, Musharaka is a financing method based on the Islamic Bank providing part of the money and the client a part, and the bank and the client become the owners of the capital of the company. And therefore share in the profit or loss as agreed.

1. Legitimacy of Musharaka

The legitimacy of the Musharaka is based on the injunctions of the Qur’an, Sunnah, and Ijma (consensus) of the scholars. In the Holly Quran Allah, Glory be to Him, says:

…And, verily, many partners oppress one another, except those who believe and do righteous good deeds, and they are few…. (Al Quran 38:24).

3.Types Of Musharaka :

Diminishing Musharaka:

a musharaka where the Islamic bank gradually transfers its share in the Musharaka to the other party (Musharik ) so as to decrease its share in order to transfer the ownership of the venture to the other party.

Constant Musharaka :

a musharak in which the partners’ shares in the capital remain constant throughout the period as specified in the musharaka contract.

4. Principles Of Musharaka

Musharaka contract Parties :

In Musharaka, partnership can be concluded between two or more parties.

Capital of Musharaka :

In Musharaka, the capital must be contributed by all partners. Capital can be in the form of monetary assets or in the form of tangible assets. It can be contributed in a lump sum or in various installments even in different currencies. Using debt alone as the capital to the partnership is not permitted, except to the condition when it becomes inseparable.

Management of Musharaka:

In Musharaka, all partners have equal right to take part in its management. However, the management of partnership can be restricted to certain partners or to a single partner, in which case the other partners are not allowed to act on behalf of the partnership.

Some or one of the partners can be appointed as a manager on the basis of an independent contract other than the Musharaka contract and can be paid remuneration. A manager other than the partners can also be appointed and can be paid a fixed remuneration.

Guarantee to Musharaka:

All partners maintain assets of Musharaka on trust basis. Therefore, no one is liable, except in the case of misconduct, negligence or breach of contract. A partner cannot guarantee the capital of another partner except when one provides a personal guarantee to cover cases of misconduct, negligence or breach of contract. A third party can also provide a guarantee to the capital of the partners.

Musharaka Profit Distribution:

The proportion of profit to be distributed between or among partners must be agreed upon at the time of effecting the contract. The profit sharing ratio can be one other than the capital contribution ratio, but cannot be a lump sum or a percentage of capital. It is, however, not permitted to defer the determination of the profit percentage owing to each partner until the realization of profit.

Musharaka Loss :

Muslim jurists are unanimous on the point that proportions of losses borne by partners must be equal to the proportions of their capital contributions.

Musharaka Maturity and termination:

In Musharaka each partner has a right to terminate the Musharaka after giving due notice. Partners can enter into a binding promise to continue the partnership for a period of time.

In case of maturity, assets can be distributed in a fixed proportion between or among partners. If this is not possible, then one of the partners can buy all the assets as per their market value (not on face value) and pay the proceeds to others.

A Musharaka can also come to an end on the expiry date or as per the agreement of partners to terminate prematurely, or in case of death or incapacity of a partner.

Operational Procedure Of Musharah

The customer wants to own a particular property but he has not sufficient money. the islamic bank participates in its purchase, and in this case the property is owned by a third party (the seller).

In Islamic banking Partnership is proceeded in the following manner:

1. The islamic bank owns the property from its original owner with a purchase contract for the property, pays the landlord and islamic bank records the property in its name.
2. A Diminishing Musharaka contract shall be entered into between the Islamic Bank and the customer wishing to own the property, on the basis of which the customer pays part of the amount.
3. The customer promises to buy all the shares.
4. The Islamic bank signs an agreement by which the customer buys the bank’s shares gradually until the customer buys all of them.