musharakah presentation slides

Introduction of Musharakah.Types of Shirkah.Management of MusharakahMusharakah as Mode of Financing.

Diminishing Musharakah

Termination of MusharakahDifference between Interest Based Financing

and Musharakah.

Musharakah

Musharakah means ‘sharing.’ The root of the word is Shirkah, which means ‘being a partner.’ Under Islamic law, Musharakah is a joint enterprise, formed for conducting business, in which all partners share the profit according to a specified ratio, while the loss is shared according to the ratio of the contribution.

Introduction of Musharakah

Al Quran

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”

Reported by As–Saib Al–Makhzumi R.A that he used to be a partner of the Prophet S.A.W (in business) before his Prophet-hood. During the opening of Mecca he said to the Prophet S.A.W: “Welcome my brother and partner!”

Hadith

ShirkahShirkat-ul-Milk

(ownership partnership)

Shirkat-ul-Aqd (contractual

partner)

Compulsory Shirkat-ul-Milk (Ghair Iktiari) Shirkat-ul-Aamal

(Labour)Partnership in Services

Shirkat-ul-Amwal(Capital)Partnership

in trade

Shirkat-ul-Wujooh (Good

will/Credit)Partnership in Good will

Optional Shirkat-ul-Milk

(Ikhtiari)

Musharakah

“Joint ownership of two or more persons in a particular property.”

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:>Optional Shirkat-ul-Milk (Ikhtiari)>Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

Shirkat-ul-Milk (Ownership Partnership)

If two or more person purchase an equipment, 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 their own option, as they themselves elected to purchase the equipment jointly.

Optional Shirkat-ul-Milk

There are cases where this kind of “Shirkah” comes to operate automatically without any 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 an automatic consequence of the death of that person.

Compulsory Shirkat-ul-Milk

“A partnership effected by a mutual contract in which the partners join together with different contributions, work or obligation for the purpose of earning profit”.

“Joint commercial enterprise.”

Shirkat-ul-‘aqd is further divided into three kinds: 1. Shirkat-ul-amwal (Partnership in Trade “Capital”)

2. Shirkat-ul-A’mal (Partnership in Services “Labour”)

3. Shirkat-ul-wujooh (Partnership in Goodwill)

Shirkat-ul-Aqd

“Where all the partners invest some Capital into a Commercial enterprise.”

It is the most important & commonly used form of Shirkat

Shirkat-ul-Amwal (Partnership in Trade “Capital”)

“Where all the partners jointly undertake to provide some services for their customers”.

The fee charged from them is distributed among them according to an agreed ratio.

If two persons agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done.

Shirkat-ul-Aamal (Partnership in Services “Labour”)

“The word Wujooh comes from Wajahat meaning goodwill” Hence this is a partnership in Goodwill.

Here the partners contribute in the business not through capital but through their goodwill and share profit at an agreed ratio

All they do is that they purchase the commodities on a deferred(not on time) price and sell them at spot. The profit so earned is distributed between them at an agreed ratio.

Shirkat-ul-wujooh (Partnership in Goodwill)

All these modes of “Sharing” or partnership are termed as “Shirkah” in the terminology of Islamic Fiqh, while the term “Musharakah” is not found in the books of Fiqh.

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”. That is, the 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

Musharakah (General discussion)

Musharakah means relationship established under a contract by the mutual consent of the parties for sharing of profits and losses, arising from a joint enterprise or venture.

Investments come from all partners / shareholders hereinafter referred to as partners.

Profits shall be distributed in the proportion mutually agreed in the contract.

Rules of Musharakah

- Each partner has a right to take part in Musharakah

management.- The partners may appoint a managing partner by

mutual consent(Agreement).- One or more of the partners may decide not to work

for the Musharakah and work as a sleeping partner.- 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 bears so the total capital investment in Musharakah.

Management of Musharakah

Is a type of Partnership (Shirkah) whereas one Partner (Client A) purchasing the other Partner (Financer B) Shares gradually.

-To create joint ownership in the property (Shirkat-ul-Milk). -Giving the share of the financier to the client on rent.-Promise from the client to purchase the units of share of the financier.-Actual purchase of the units at different stages.

Diminishing Musharakah

Client (A) Financer (B)

Financer (B) received share price in the form of rent from Client A.

20% shares in joint ownership

80% shares in Joint Ownership

60% shares reduce by selling shares 40% shares reduce by selling shares 20% shares reduce by selling shares All shares in joint ownership sell out to Client A.

40% shares increase by purchasing shares



Client A is Sole proprietor

Property sell on (Client A & Financer B)

Interest base financing vs Musharakah In interest base financing, the

financer predetermines a fixed rate of return on loan.

Financier can not be suffer loss.

Profit and loss, creditor may use high profit margin as compare to society.

In Musharkah, the return is based on the actual profit earned by the joint venture.The financer can suffer loss.In this system, all the partners share the profit according to specified ratio, while the loss is share according to the ration of contribution or investment.

Profit of the most of the business contracts in Islamic banking are determined on the basis of interest rate(KIBOR or LIBOR) as benchmark which is one of the major criticism against Islamic banking.

In the above studies, noted that proposed models resultants much profitable.

The study recommend that the proposed models best alternative to interest rate benchmarking for setting the profit rate.

Alternate to KIBOR for Islamic Banking

Different Alternatives for Islamic banks are proposed to determine their profit rate.

Ghazali(1994) “Rate of Dividend of Islamic banks Deposits and Investment Account model”Usmani(2007) “The creation of an inter Islamic bank Market based on Islamic Principles”Hassan(2009) “A benchmark that can fit both Islamic & Conventional banks”.Another idea “Islamic Interbank Benchmark Rate (IIBR)” was given by a group of 16 banks working with Industry Associations and data provider Thomson Reuters.

Alternative to KIBOR Islamic Banking

Islamic Banks use interest rate as bench mark in sale (Murabaha) and rent (Ijarah & Diminishing Musharakah) based on financing modes.

Profit and rent is set keeping in view the ongoing market interest rate.Difference of Opinions: Usmani 2007 claim that using an interest rate benchmark for determining profit of permissible transaction is not prohibited(Haram).Usmani2007 adds that even though this measure is permissible but not desirable and Islamic banks as well as other financial institutions should leave this process as soon as process.


Islamic Interbank Benchmark Rate IIBR:According to this model, the idea was to collect the different rates the Islamic branches of conventional banks were offering and set a rate through a mechanism known as “fixing”, i.e. To remove the top and the bottom rates and then taking an average of the middle 8 rates and setting that as final rate for the Islamic banks.


Diminishing Musharakah Model- Joint ownership between bank and client.- Bank purchases the property on behalf of Musharakah.

While client takes the property on lease from the bank.- The Property generates rental income for the bank where

rents is usually determined around KIBOR.- The share of the bank usually divided into different number

of units which the client purchases periodically. When shares transfer completed, bank transfers the ownership to client.


Proposed Model- Bank and Client 5years contract.- Client pay rent (80% and additional amount for

transfer of shares.- End of each year, The property’s value will be

reassessed and new rent as well as additional amount will be redefined according to reassessed value.

- Rate of Rent/Profit of the bank in this cases is decided using market prices(house prices & rental data) as benchmark.


musharakah presentation slides

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