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8/11/2014 1Islamic Finance. Dr . Zohra Jabeen

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Musharakah Finance

Islamic Finance

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Table of Contents

Concept & Definition Musharakah in Quran and Hadith

Pillars of Musharaka

Process flow diagram of Musharakah

Kinds of Musharakah Basic Rules & Feathures

Distribution of profit & loss

Termination Musharakah in Islamic Banking

Islamic Finance Presentation


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Musharakah

Musharakah Arabic origin word. literally means sharing

derived from Shirkah which means being a

partner. In the context of business and trade it means a

joint enterprise in which all the partners sharethe profit or loss of the joint venture

It is an islamic mode of financing and alternativeto interest-based financing or banking.



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The Concept of Musharaka

Musharakais a joint venture partnership

where by two (or more) parties contribute to

the capital and participate in the managementto execute a potentially successful project

with the purpose of earning halalprofit, which

will be shared among the partners.



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Musharakah in Quran and Hadith



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Allah has declared

that He will become a partner in a businessbetween two Musharik (partners) so long as

they do not indulge in cheating or breach of

trust (Khiyanah).



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PILLARS OF MUSHARAKAH

1. Shuraka

Shareholders

2. RasulMal

Capital

3. Mashru Project or business venture

4. Ribh

Pre-determined profit allocation

5. Sighah

Ijab (Offer)

Qabul (Acceptance )



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Processflow

Rasul-Mal

(Capital)Mashru

(Project)

Shuraka

(Shareholders)

Shuraka

(Shareholder)

Ribh(Predeter

mined

profit

rate)

Ijab & Qabul

Profit/Loss

Profit/Loss



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Kinds of Musharakah

SHIRKAH (Partnership)

Shirkat-ul-Milk (Joint ownership)

By Choice Without Choice

Shirkat-ul-A'qd (Business partnership)

A'amal (partnership in work) Wujooh (reputational partnership)Amwaal (partnership with capital)



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Kinds of Musharakah

Shirkat ul-milk(partnership of ownership): It means jointownership of two or more persons in a particularproperty.

This kind of Shirkah may come into existence in two different

ways.1. By the partners choice: means coming into the

operation at the option of the parties. For example, iftwo partners agree to buy equipment it will be ownedjointly by both of them.

2. Without the partners choice: means coming into theoperation automatically without any action taken bythe parties. For example, if property is inherited.



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Cont

Shirakal al-aqd(partnership of a contract):

means a partnership through a mutual contract.

This kind of Shirkah exists in three types:

1. Shirkal ul-amwal(financial company): all thepartners invest some capital into a commercialenterprise.

2. Shirkat ul-amal(company of workmanship): all thepartners jointly undertake to render some services

for their customers and the fee charged from themis distributed among them according to an agreedratio.



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Cont

3. Shirkal ul-wujooh:

Wujooh refers to goodwill, creditworthiness, and good

reputation.

Creditworthiness and reputation as a form of wealth Partnership upon credit is where two persons who do not

contribute any property, become partners by agreeing to

purchase goods jointly upon their personal credit (without

immediately paying the price) and to sell them on their joint

account.



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Cont

Both partners do not contribute any capital. They purchase

commodities at a deferred price and sell them for cash.

Partner may equally share the profit. It is also possible that

one of the partners may own a greater share of the goods

than the others based on an agreed ratio.



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Rules of Musharaka

Management of Musharaka

Each 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.



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The basic rules and Features of Musharakah

Investments come from all partners/shareholders

hereinafter referred to as partners.

Profits shall be distributed in the proportion mutually

agreed in the contract.



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The basic rules and Features of Musharakah

The existence of Mutaaqideen(Partners):

Capability of Partners: Must be sane & mature andbe able of entering into a contract.

The contract must take place with free consent ofthe parties without any fraud or misrepresentation.

If one or more partners choose to become non-working or silent partners, the ratio of their profit

cannot exceed the ratio which their capitalinvestment.



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Cont

It is not allowed to fix a lump sum amount for any of

the partners,or any rate of profit tied up with his

capital.

A management fee however, can be paid to thepartner managing the Musharakah provided the

agreement for the payment of such fee is

independent of the Musharakah agreement.

Losses are shared by all partners in proportion to

their capital.



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Cont

All assets of Musharakah are jointly owned in

proportion to the capital of each partner.

All partners must contribute their capital in terms of

money or species at an agreed valuation. The presence of the commodity: This means the

price and commodity itself.



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Cont

The rate of profit sharing should be determined: The

share of each partner in the profit earned should be

identified at the time of the contract. If however, the

ratio is not determined before hand the contractbecomes void (Fasid).

Therefore identifying the profit share is necessary.



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The proportion of profit to be distribution

among the partners must be determined and

agreed upon at the time of contract.

Otherwise the contract is not consider valid

under shariah.

Distribution of Profit



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ILLUSTRATION

If A and B enter into a partnership and it is agreed

between them that A shall be given Rs. 10,000/-

per month as his share in the profit, and the rest

will go to B, the partnership is invalid. Similarly, ifit is agreed between them that A will get 15% of

his investment, the contract is not valid. The

correct basis for distribution would be an agreed

percentages of the actual profit accrued to the

business.



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Islamic jurist views

According to Imam Malik and Imam shafi, it is

necessary that each partner's share the profit

is exactly equal to the proportion of initialinvestment into the partnership



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according to the Imam Ahmad, the ratio of

profit distribution may vary without restriction

from the ratio of investment.



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According to the Imam Abu Hanifah, the ratio

of profit distribution may vary. However for

silent partner (non active member who only

contribute capital ).it can not be any higherthen the ratio of investment.



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Sharing of Loss

In the case of losseach partner shallsuffer the loss exactlyaccording to the ratio

of his investment. If apartner has invested40% of the capital, hemust suffer 40% of the

loss, not more, notless.



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Nature of capital

According to the Imam Malik and

Hambali jurist, the nature of capital is not

a restriction in musharakah arrangement.Therefore in kind (non cash) contribution

of partners are allowed, which are based

on the market value of the commoditycontributed.



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According to the Imam Abu Hanifah and ImamAhmad, no in kind contribution are allowed inmusharakah arrangement.

According to the Imam Shafi, makesdistinction between replaceable and

irreplaceable commodities.The view of Imam Malik has been widelyaccepted.



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Termination of Musharakah



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Termination of Musharakah

Musharakahis deemed to be terminated in any oneof the following events:

(1) Every partner has a right to terminate theMusharakah at any time after giving his partner a

notice to this effect, whereby the Musharakahwill come to an end.In this case, if the assets of the musharakah are incash form, all of them will be distributed pro ratabetween the partners. But if the assets are not

liquidated, the partners may agree either on theliquidation of the assets, or on their distributionor partition between the partners as they are.



l

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Cont

IN CASE OF A DISPUTEIf there is a dispute between the partners in thismatter i.e. one partner seeks liquidation whilethe other wants partition or distribution of the

non-liquid assets themselves, the latter shall bepreferred, because after the termination ofmusharakah, all the assets are in the jointownership of the partners, and a co-owner has aright to seek partition or separation, and no one

can compel him on liquidation. However, if theassets are such that they cannot be separated orpartitioned, such as machinery, then they shall besold and the sale-proceeds shall be distributed.



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Cont

(2)If any one of the partners dies during themusharakah, the contract of musharakah withhim stands terminated. His heirs in this case,will have the option either to draw the shareof the deceased from the business, or tocontinue with the contract of musharakah.

(3)If any one of the partners becomes insaneor otherwise becomes incapable of effectingcommercial transactions, the musharakahstands terminated.



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Cont

If one of the partners wants termination of themusharakah, while the other partner or partnerslike to continue with the business, this purposecan be achieved by mutual agreement. The

partners who want to run the business maypurchase the share of the partner who wants toterminate his partnership, because thetermination of musharakah with one partner

does not imply its termination between the otherpartners.



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Cont

However, in this case, the price of the share of

the leaving partner must be determined by

mutual consent, and if there is a dispute

about the valuation of the share and thepartners do not arrive at an agreed price, the

leaving partner may compel other partners on

the liquidation or on the distribution of theassets themselves.



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Musharaka in Islamic Banks

8/11/2014 Islamic Finance. Dr . Zohra Jabeen 36


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Islamic banks in Pakistan

Some of the islamic banks that deal

musharakah financing are as follow.

Mezan Bank

Bank Islami

Al-Baraka Bank




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Application of Musharakah in Meezan Bank

Liability side

Meezan Bank has successfully launched Riba Free

Certificates of Islamic Investment (COII) in 2000

Recently Meezan Banks has also introduced

Saving accounts based on Musharakah




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Musharakah Sukuk

Musharakah Sukuk are securities in which itsholders are owners of a specified property in

common. Sukukholders will gain (lose) from any

increase (decrease) in the underlying assetprices. (S.A.Mousavian,2006)

Musharakah Sukuk have a specified maturity

date, and are negotiable in the secondarymarket.




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Riba Free COII

Product Features

Name: Riba Free Certificate of Islamic Investment.

(COII)

Tenure: 3 month, 6 month, 1 year, 2 years, 3 years

& 5 years

Minimum Investment: Rs. 50,000/-

Profit option: Monthly, Quarterly, at Maturity




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Riba Free COII

Basic Concept:

Riba Free COII is a Musharakah-based contract

between Meezan Bank and its customer.

All the principles and rules pertaining to

Musharakah are strictly adhered.

Profit and loss is shared according to the rules of

Islamic Fiqh.




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Riba Free COII

Depositor is a partner with the bank in an

investment pool formed as a result of

Musharakah

The Bank acts as an investor as well as a workingpartner

Whereas the depositors are investors and

sleeping partners.




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Riba Free COII

Profit depends on the return of this pool and iscalculated on a quarterly basis.

Investors share the profit in a pre-agreed ratio

In case of a loss the Investor is liable to share it inthe ratio of investment




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Asset Side

On the Asset side Meezan Bank has successfully

used Musharakah for fulfilling the financingneeds of its customers.




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Sitara MTFCMeezan Bank acted as a joint lead manager and

Shariah Advisor in successful issuance of Sitara

Chemical Industries Musharakah Term Finance

Certificates.

The transaction has achieved financial close of Rs

225 million in private placement.




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Musharaka Sukuk in Practice

US$550 million sukuk transaction for Emiratesairline, the seven-year deal was a structured on aMusharaka contract. The Musharaka or joint

venture was set up to develop a new engineeringcentre and a new headquarters building on landsituated near Dubai's airport which will ultimatelybe leased to Emirates. Profit, in the form of lease

rentals, generated from the Musharaka venturewill be used to pay the periodic distribution onthe trust certificates.




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ASKARI HOME MUSHARAKAH

(MUSHARAKAH HOME FINANCE)




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Askari Home Musharakah: How it Works?

Joint ownership is created in the property between Bank &Customer on the basis of the Musharakah Agreement. (Thisis bases on the principles of Shirkat ul Milk).

Banks share is divided into units and is given to the clienton rent.

Client promises to purchase Banks share (units) over thetenure of transaction.

Client purchases the units every month and will eventuallybecome the owner of the property.

Rental amount will be adjusted according to the banks

share (units) remaining in the property. Askari Home Musharakah has tailor made solutions to meet

your needs

s a c a ce ese tat o


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..

Alhamdolillah!

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