MUSHARAKA&

Mudarbah

Muhammad Iftikhar Baig

WHAT IS MUSHARAKA?Musharaka literally means Sharing.

The word Musharaka has been derived from “Shirkah” which means being a partner.

It is an ideal alternative for the interest based financing with far reaching effects on the economy.

WHAT IS MUSHARAKA?

“Musharaka means a joint enterprises formed for conducting some business in which all partners invest capital in the form of money or in kind”.

Types of Shirkah

SHIRKAH

SHIRKAT-UL-MILK SHIRKAT-UL-AQD

SHIRKAT-UL-WUJOOH

GAIR IKHTIARIIKHTIARI

SHIRKAT-UL-AAMAL

SHIRKAT-UL-AMWAL

PresenShirkat-Ul-Milk

• 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. Optional Shirkat-ul-Milk (Ikhtiari)

2. Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

PresenShirkat-Ul-Milk

Optional Shirkat-ul-Milk (Ikhtiari)

• If two or more person purchase any property, it will be owned jointly by both of them and the relationship between them with regard to that property is called “Shirkat-ul-milk.”

• Here this relationship has come into existence at the option of the parties, as they themselves elected to jointly purchase the asset.

PresenShirkat-Ul-Milk

Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

• This comes into existence without any effort/action taken by the parties.

• For example, after the death of a person all his heirs inherit his property, which comes into their joint ownership as a natural consequence of the death of that person.

SHIRKAT-UL-AQD

PresenShirkat-Ul-Aqd

• Shirkat-ul-Aqd (contractual partnership) means an agreement between two or more parties to combine their assets, labour or liabilities for the purpose of making profits.

• It can also be translated as a joint ommercial enterprise.

PresenShirkat-Ul-Aqd

Shirkat-ul-Aqd is divided into three types:

Shirtkat-ul-Amwal (contractual partnership)

Shirtkat-ul-A’mal (vocational partnerships)

Shirtkat-ul-Wujooh (liability partnership)

PresenShirkat-Ul-Aqd

Shirkat-ul-Amwal (Contractual Partnership)

• A partnership between two or more parties whereby each partner contributes a specific amount of money.

• The profit is distributed according to the partnership agreement and the losses are borne in accordance with the contribution of each partner to the capital.

PresenShirkat-Ul-AqdShirkat-ul-A’mal (Vocational Partnership)

• It is an agreement between two or more parties to provide services pertaining to a profession, vocation or skilled trade.

• The service partnership has no monetary

capital, because the subject matter of the partnership is rendering services.

• The profit shall be distributed among the

partners according to the agreed ratio, but the contract should not specify that a lump sum be paid from the profit to a particular partner.

PresenShirkat-Ul-AqdShirkat-ul-Wujooh (Partnership in Liability)

• It is a bilateral agreement between two or more parties to buy assets on credit on the basis of their reputation for the purpose of making profit.

• The partnership in creditworthiness has no monetary capital.

• The profit shall be distributed according to the

agreement. However, the loss will be borne by each partner according to the ratio that each partner had undertaken to bear in proportion to overall assets that are purchased on credit.

PresenMusharakah

• The term Musharakah has been introduced recently by those who have written on the subject of Islamic modes of financing

• It is normally restricted to a particular type of “Shirkah”, i.e. Shirkat-ul-amwal, where two or more persons invest some of their capital in a joint commercial venture.

• However, sometimes it includes Shirkat-ul-a’mal also where partnership takes place in the business of services.

Features of Musharaka

profit is shared according to an agreed ratio between the partners at the inception of Musharaka Agreement.

However, according to Sharia’h principles the loss is shared as per the ratio of investment.

Features of MusharakaEach 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.

MUDARABA

WHAT IS MUDARABA?Mudaraba is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprises.

The investment comes from the first partner who is called “Rabb-ul-Mal”.

while the management and work is an exclusive responsibility of the other, who is called “Mudarib”.

Musharaka Vs MudarabaMusharaka Mudaraba

All partners invest.

Only Rab-ul-Mall invests.

All partners share loss in the ration of investment.

Only Rab-ul-Mall suffers loss.

All partners can take part in management of business.

Mudarib is solely responsible for management of business.

Unrestricted and Restricted Mudaraba

An Unrestricted Mudaraba contract is a contract in which the capital provider permits the Mudarib to administer a Mudaraba fund without any restrictions. In this case, the Mudarib has a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. A restricted Mudaraba contract is a contract in which the capital provider restricts the actions of Mudarib to particular location or to a particular type of investment as the capital provider considers appropriate, but not in a manner that would unduly constrain the Mudarib in his operations.

Musharakah can be successfully used to in the following areas:

• Project financing• Working capital financing• Import Financing• Export Financing• Running finance• Saving account• Certificates of Investments• Term finance certificates• Treasury Bills• Inter bank lending/borrowing

Musharakah as a Mode of Financing

ENTREPRENEUR

ISLAMIC BANKINVESTMENT

ACCOUNT HOLDERS

ISLAMIC BANK

RAB-UL-MAL RAB-UL-MAL MUDARIBMUDARIB

DEPOSITSDEPOSITS

INVESTMENTSINVESTMENTS

Mudaraba in Banking

• Profit from the Mudaraba activity is shared between the Bank (as Mudarib) and the investment account holder (as Rabb-ul-maal) in a pre-agreed ratio

• The Bank does not bear any loss but remains responsible for negligence

• The Bank may receive from its investors compensation (Mudarib fees) in return for management of their funds

• The Bank is bound to return the capital to the investors after deducting any losses or Mudarib fees at the time of winding up the contract

Deposits - The Bank as Mudarib

Mudaraba in Banking

• Profit from the Mudaraba activity is shared between the Bank (as Rabb-ul-maal) and the Mudarib in a pre-agreed ratio

• The Bank will bear all the loss unless the Mudarib violates the agreement

• The Bank will pay to the Mudarib, compensation(Mudarib share ) in return for management of its funds

• The Mudarib is bound to return the capital to the Bank after deducting any losses or Mudarib fees at the time winding up of the contract

Investments - The Bank as the Rabb-ul-maal

Mudaraba in Banking