Q. What is Musharakah?
The term refers to a financing technique adopted by Islamic banks. It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. All providers of capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his contribution.
2. Musharaka (Partnership Financing):
This is a classical partnership agreement. All parties involved contribute to towards the financing of a venture. The parties share profits on a pre-agreed ratio while losses are shared according to each parties equity participation. Here again the reason is because in Islam, one cannot loose what they did not contribute. Management of the venture is carried out by all, some, or just one party member.
3. Musharaka (Joint Venture)
We add our funds to your funds, and participate in the equity of the project. We share profits and losses in direct proportion to our contributions.
Musharaka is another popular techniques of financing used by Islamic banks. It could roughly be translated as partnership. In this technique two or more financiers provide finance for a project. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. However, the losses, if any, are to be shared exactly in the proportion of capital proportion. All partners have a right to participate in the management of the project. However, the partners also have a rig ht to waive the right of participation in favour of any specific partner or person.
5. Permanent Musharaka:
In this form of Musharaka an Islamic bank participates in the equity of a project and receives a share of profit on a pro rata basis. The period of contract is not specified. So it can continue so long as the parties concerned wish it to continue. This technique is suitable for financing projects of a longer life where funds are committed over a long period and gestation period of the project may also be long.
6. Diminishing Musharaka:
Diminishing Musharaka allows equity participation and sharing of profit on a pro rata basis but also provides a method through which the equity of the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset on of the participants. The contract provides for a payment over and above the bank share in the profit for the equity of the project held by the bank. That is the bank gets a dividend on its equity. At the same time the entrepreneur purchases some of its equity. Thus, the equity held by the bank is progressively reduced. After a certain time the equity held b y the bank shall come to zero and it shall cease to be a partner. Musharaka form of financing is being increasingly used by the Islamic banks to finance domestic trade, imports and to issue letters of credit. It could also be applied in agriculture and Industry.
7. Musharaka (Venture Capital):
This Islamic financing technique refers to a partnership between two parties, who both provide capital towards the financing of a project. Both parties share profits on a pre- agreed ratio, but losses are shared on the basis of equity participation. Management of the project is carried out by both the parties.
Q - Will it be lawful for a company lo enter into a musharakah for a business enterprise with an interest-based bank when there is an understanding that business will be conducted in a manner that conforms to the principles of the Shariah?
A - There is no legal impediment into entering into a musharakah with an interest-based bank for the purpose of conducting lawful business. The evidence for the legitimacy of this opinion is that the Prophet of Allah himself, upon him peace be peace, is known lo have done business with the Jews, and they dealt with interest. Except that the Prophets dealings with them were confined only lo lawful transactions in which interest was not involved. After him, his Companions did the same.
Q - When a bank agrees to enter into a musharakah with one of its clients for the purchase and sale of goods, will it be necessary for the bank to deposit a cash amount as its share of the capital investment at the time the contract is signed? Or will it be lawful for it to deposit the capital as the need arises?
A - When the agreement is made between the bank and its client to enter into a musharakah for the purchase and sale of goods, and the amount of capital to be invested (by both parties) is determined, this will be the same as a mutual promise to enter into a partnership. A partnership, however, will not be legal until both parties have actually paid their shares of the capital. Thereafter, all accounting for profits and losses will be based on the percentage of the amounts actually invested by each of the partners.
Q - Will it be lawful for the bank to present letters of surety in return for its receiving a percentage of profits? The letter of surety will be issued for the musharakah accounts, and may be considered a part of the bank's share in the capital investments. Will all of this be lawful?
A - The bank may not lawfully present letters of surety and then consider its doing so a part of its share of the capital investment in a musharakah. This is because surety indicates a readiness to lend, and a loan may not be used for the capital invested in a musharakah because a loan is a debt. So a readiness to lend is even less acceptable. Moreover, if an exporter seeks a letter of surety for a share of profits from a musharakah, he will be taking a fee for the surety. Whereas the Jurists have said, and this has become a legal principle, that it is not lawful to take a fee for a letter of surety. Therefore, it will not be lawful to consider a letter of surety an instrument of the banks financing a musharakah.
Q - Is it possible to securitise a musharakah transaction?
A - Musharakah is a mode of financing which can be securitized easily, especially, in the case of big projects where huge amounts are required which a limited number of people cannot afford to subscribe. Every subscriber can be given a musharakah certificate which represents his proportionate ownership in the assets of the musharakah, and after the project is started by acquiring substantial non-liquid assets, these musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market.
However, trading in these certificates is not allowed when all the assets of the musharakah are still in liquid form (i.e. in the shape of cash or receivables or advances due from others). It must be noted that subscribing to a musharakah is different from advancing a loan. A bond issued to evidence a loan has nothing to do with the actual business undertaken with the borrowed money. The bond stands for a loan repayable to the holder in any case, and mostly with interest. The musharakah certificate, on the contrary, represents the direct pro rata ownership of the holder in the assets of the project. If all the assets of the joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project.