MUSHARAKA

MUSHARAKA
Lexically meaning sharing / merging

Technically it is co mingling of two or

more persons either their money or
works or obligations to earn a profit or a
yield or appreciation in value and to
share the loss if any according to their
proportionate ownership.
CONCEPT OF MUSHARAKA

The Concept of Musharaka can be

grasped through the distinction
between two terminologies;

Shirkah: It means sharing

Musharaka is limited than the term

Shirkah
 KINDS OF SHIRKAH

There are two kinds of Shirkah

Shirkah ul milk (Joint Ownership)

Shirkat Ul Aqd (Partnership)

Distinction B/w the Two
Shirkat ul milk is the mixing of
the shares mandatory or by
choice.
Shirkat ul Aqd is offer and
acceptances.
Shirkat ul Milk is not for sharing
of profit.
Shirkat ul Aqd is seeking of
profit.
Distinction B/w the Two
cont.

The distribution of the revenue of

Shirkat ul Milk is always subject
to ratio of shares.
Profit sharing ratio is subject to
agreement in Shirkat ul Aqd.
Co owners are not agents of
each other in Shirkat ul Milk.
Partners are agent of each other
in Shirkat ul Aqd.
Kinds of Shirkat ul Aqd
Shirkat ul Amwal
Partner ship in capital.

Shirkat ul Amal
Partners undertakes to render services and shares
the fees charged by them.

Shirkat ul Wujooh
Partner will avail credit from Market and sell the
commodity to share profit at an agreed ratio.

The Musharaka is limited to the first kind.

 Rules of Musharaka

Form OF Capital either in

Liquid or Kind.

Merging OF Capital

Actual Merger
Constructive Merger
 Rules of Musharaka
continued

To be quantified and specified.

It is not necessary for a capital to
be in the physical possession of
the partners rather it is enough to
be at the managers disposal.
Converting debt in equity
Valuation of RUNNING business
 Features of Musharaka

Partners are agents of each other ; In

principle each partner is entitled to act in the
interest of the partnership unless all the
partners agree that the management of the
partnership will be restricted to certain
partners . It is permissible for the partners to
appoint a manager / management to conduct
the business for consideration of a fixed
remuneration . It is equally permissible for a
partner to contribute in management against
a fixed remuneration other than this sahre in
profit
 Features of Musharaka
continued

Fiduciary relation among the partner;

No partner can guarantee other partner(s) ,
however he is responsible for any loss due
to his negligence.
Limitation of rights; Partners can limit the
rights of management , whether it is
comprised of some of the partners or
outsiders. Any act by management beyond
its limits would be considered as
negligence
RULES RELATING TO PROFIT

Profit Sharing decided at the

beginning of partnership.
Profit should be allocated in the
percentage form and not in money
or as a percentage of capital.
Not necessary for shares of profits
be in proportion to the percentage
of the contributed capital.
RULES RELATING TO PROFIT
continued

Sleeping partner cannot share the

profit more than the % of his capital.
Partners may at later stage agree to
amend the %of profit and on the date
of distribution a partner may
surrender a part of his profit to
another partner.
Profit can be capped to a certain
amount of money.
 RULES RELATING TO PROFIT
continued

The final allocation of profit is not

allowed to be based on expected
profit however it is permissible to
distribute a provisional profit which
is subject to final settlement after
actual or constructive liquidation.
It is permissible for partners to
decide not to distribute a portion of
profit.
 RULES RELATING TO LOSS

Losses borne by partners must be in

proportionate to their shares in
investment , however one partners
may bear the loss of another(s)
partners , but without any prior
arrangement.
 Termination
Each partner is entitle to terminate the
partnership with the prior notice.
Continuity of Business after withdrawal
by one of the partner.
Partnership for a limited time period.
When the purpose of forming a
partnership is achieved.
In case of death or insolvency of
partners
 SETTLEMENT AFTER
TERMINATION

Incase when a Shirkah venture comes to an end at the

maturity or termination before the expiry, the business
shall be liquidated actually and the settlement between
the partners will take place. It is also permissible for the
partners to distribute the assets of partnership by mutual
consent if it is possible.
In case when one of the partners withdraws his shares
without closing the business the venture will be
liquidated
constructively.

In long term Musharaka it is permissible to liquidate the

business constructively time to time to distribute the profit
of after a certain tenor.
I
SECURITY
In principle, a partner can’t demand the other
partner to provide security in any form because
their rights and obligations are same and they are
agents for each other, however in case of
Musharaka agreement between bank and the
client, the bank shall obtain adequate security from
the partner against his misconduct and negligence
(if any).
Guarantee in Musharaka

i.It is permissible to stipulate in Musharaka

contract a personal guarantee or a pledge to cover
cases of misconduct, negligence or breach of
contract.
 SECURITY CONTINUED

ii. A third party may provide a guarantee to make up a loss of capital

of some or all partners. However the following conditions should be met in
such a case:

a. Third party should be independent in its legal capacity and financial liability

b.Third party should be a volunteer in guarantee and have no link in any

manner to the Musharaka contract

c. The guarantor should not own more than a half of the capital in the entity
to be guaranteed

d.The guaranteed should not own more than half of capital in the entity that
undertakes to provide a guarantee

e. The guaranteed entity has to meet its obligations under the contract even if
the guarantor fails to meet his promise
 Area of use
Liability side Financing:

 Remunerative bank accounts

 Inter-bank lending and borrowing
 Tradable instruments

Asset side Financing

 Short/medium/long term financing

 Project financing
 Permanent or temporary equity
 Single transaction financing
 Working capital financing
 Running finance
 Trade financing
PROBLEMS IN IMPLEMENTATION OF MUSHARAKA
IN CURRENT BUSINESS ENVIRONMENT

 Actual profits are not disclosed.

 Unexpected cost(s).
 Misconduct of working partner.
Evaluation of a running business.
POSSIBLE IMPLEMENTATION OF
MUSHARAKA

Export financing.
Import financing.
Overdraft facility.
Musharaka in assets yielding fixed
return.
DIMINISHING MUSHARAKA

Diminishing Musharaka is derived from Arabic

term “Al Musharakat-ul-Mutanaqisa”. It is a form of
partnership, whether it is Shirkat-ul-‘Aqd or
Shirkat-ul-Milk, where partner ‘A’ promises to buy
the equity shares of partner ‘B’ gradually until the
ownership is completely transferred to ‘A’.

This Musharaka is different from the permanent

Musharaka in one aspect, which is in -
continuation.
STEPS FOR THE ARRANGEMENT
CONTINUED

This arrangement is completed in two steps:

A) Creation of joint ownership or joint

venture.
B) Gradual purchase of partners ‘B’s
shares by ‘A’.
STEPS FOR THE ARRANGEMENT
CONTIUNUED

Diminishing Musharaka through Shirkat-ul-‘Aqd

A and B invest their capital and create a joint venture (e.g.
a grocery shop). ‘B’ doesn’t intend to remain partner in this
venture; he will sell his shares to ‘A’ gradually and transfer
his complete title.
This arrangement will be completed in following manner:
→ A separate agreement of Musharaka is executed
→ ‘B’ will promise (with separate document) to sell his
shares to ‘A’ gradually.
→ Whole business is equally divided into a number of
units.
→ ‘A’ and ‘B’ enjoy their rights as partners as they share
the revenue in agreed ratio and bear the loss according to
their shares in capital (where shares of ‘A’ will increase and
shares of ‘B’ will decrease).
STEPS FOR THE ARRANGEMENT
CONTIUNUED

→ A will buy after a certain interval some of

B’s units where the price will be negotiated
between them at the time of sale or
determined by constructive liquidation of
the business.
 STEPS FOR THE ARRANGEMENT
CONTIUNUED

Diminishing Musharaka through Shirkat-ul-Milk:

A and B create a joint ownership of a property/asset by

combined purchase. A will purchase B’s shares gradually until
the title is completely transferred to A.
This arrangement is completed in following manner:
Joint ownership will be created
→ A will promise to buy B’s shares gradually through agreed
procedure
→ A and B will enjoy the rights of ownership and bear the
related obligations
→ Whole property/asset is equally divided into a number of
units
→ A will purchase after a certain interval some of B’s shares at
par or fair value or at a price agreed upon at the time of sale
 STEPS FOR THE ARRANGEMENT
CONTIUNUED

Conditions for legitimacy of Diminishing Musharaka:

1) To transact Diminishing Musharaka as real partnership, there must be:
a. True purpose for partnership
b. Intention for partnership
c. Consent of partners to take responsibilities of Shirkah
d. Application of principles of Musharaka/co-ownership regarding profit
and loss
2) The promise of sell/buy should be obtained by a separate document.
3)At each step of diminishing partnership proper separate
documentation should be made

Areas of use:
Project financing of fixed asset(s)
House financing
Services
Car/Transport Financing
JAZAKUMALLAH