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What is Musharakah

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What is Musharakah

Musharakah is derived from the word “Shirkat” which means sharing. Musharakah is a very important investment mode of financing in an Islamic economic system. It is a scheme of shared risk financing in which two or more parties contribute capital and labor to a business.

The profit is distributed to the partners in business in ration agreed to by the partners in advance. In a case of loss to the firm, it is also shared in proportion to the capital invested by each partner in the business. as regards the conduct of Musharakah, it is governed by the terms and conditions of agreement executed by the parties to a business.

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  1. Banking and financial services ordinance 1984

The president of Pakistan has promulgated an ordinance on December 31, 1984, wherein partnership Act 1932 section 4 has been amended to accommodate the instruments of Musharakah and the PLS schemes.

A new section 6A has been incorporated in the partnership Act 132 which saves the financier from sharing all the losses if any in addition to the losses of a venture.

  1. Musharakah Investment.

This is a temporary participation between the bank and the parties from Trade & Industry. Both agreeing to contribute their respective shares in the form of capital and labor.  The participation will come into existence through Musharakah investment agreement to be entered into between the bank and the party.

  1. The musharikah Investment shall be used only for financing the requirements of working capital of selected parties from Trade & Industry in the corporate sector.
  2. Investment: the investment of funds in the Musharakah venture shall be in the ratio agreed upon between the Bank and the party.
  3. Management: while the entire management and operation of the Musharikah venture shall remain with the party, the bank shall evaluate, supervise and monitor its performance.
  4. Sharing of Profit:
    1. The bank has been allowed complete flexibility in negotiations with their clients vis-à-vis the proportion of management fee, sharing ration of the remaining profit and the weight age, wherever it is applicable.
    2. Sharing of profit between the bank and the party is determined on the projected profit forecast.
    3. The ration of profit having been agreed to the management fee could be determined to vary with the profit projections.
    4. After first providing for the management fee, the remaining profit is distributed between the bank and clients on the basis of their respective funds employed in the venture, calculated on daily product basis. The sharing ratio of profit, after payment of Management Fee, shall not alterable.
    5. If the profit achieved by the party  is more than the profit projections given earlier the bank may, at its own discretion, allowed “good management fee” at a higher rate than originally agreed upon.
    6. If on the other hand, the profit achieved by the party is less than the projected profit, then the management fee will be reduced and it may even be wiped off in a certain situation. 
  5. Sharing of Loss:

The loss shall be shared by the bank and the party strictly in the ration of funds deployed in the business by each one of them. The bank’s share of a fund will be the actual amount financed by it, worked out on daily product basis.

                The party’s share of fund deployed in “Mushrakah” shall be the total capital deployed by them, worked out on daily product basis. The capital as deployed by the party  shall be deemed to include:

  1. Paid-up capital
  2. All types of reserves.
  3. All unappropriated profits.
  4. Long/short term loan/capital raised through participation. Term certificates etc and other
  5. Borrowing on which interest is not paid.
  6. Deduct from the total capital (a to e) losses, if any brought forward. 

    8. Weightage:

Weightage to the bank’s or the clients funds employed in the venture may also be applied wherever agreed upon.

The method of applying weightage, wherever necessary shall be conveyed to the branches along with the Sanction advice.

  1. Security:

The bank shall in its own right and discretion, obtain adequate security from the party to ensure the safety of the capital invested/financed as also for the profit that may be earned as per profit projection given by the party.

The securities obtained by the bank shall , as usual , be kept fully insured at the party’s cost and expenses.

  1. Selectivity:

Financing under Musharakah shall be restricted to such companies only as will be selected by the bank.

The selection of parties would not be confined to any particular sector of Trade & Industry and it will cover all the sectors. The basis of selection shall be their satisfactory track record, business morality, and viability of the proposal (project) for which the bank shall exercise its own discretion

  1. Criteria for selection:

The bank shall select good parties which in their opinion have.

  1. Satisfactorily operated bank account
  2. Efficient management , and
  3. Record of profit during the last 2/3 years; provided, none of the directors has been a defaulter to the bank.
  1. Option to participate:

Parties from trade & Industry have the complete option to either borrow money from the bank on existing interest-based system or if invited by a bank, participate in Musharakah.

  1. Centralized sanctioning powers.

Since the bank is taking up this system of financing for the first time which needs careful examination of each case at the highest level the power for approving working capital financing under Musharakah system shall rest with the head office only.

  1. Term & condition of financing.

The terms and conditions of financing including the mode of sharing profit or loss by the bank and the party are in the Musharaka investment agreement.