Tools of Islamic Banking & Finance: (2) Musharaka - Kickoffall Info Hub

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Friday, July 19, 2019

Tools of Islamic Banking & Finance: (2) Musharaka

Musharakah   ( مشاركة)
Musharaka is an Islamic mode of financing in the form of a partnership between two parties whereby each party funds to the capital of the project in equal or variable amounts. It may be either to start a new project or to share in an existing project. 

The profit will be distributed between the partners based on pre-agreed ratio, while losses are shared based on the percentage of equity contribution.

It is one of the best mode of Islamic finance because it encourages the parties to put their best efforts to earn profits instead of loss and this mode of finance expects the managerial skills of all partners to be contributed towards the project.

Types of Musharakah:
  1. Constant Musharakah: In the Constant Musharaka the agreement, the capital contributed by each party will remain constant throughout the period of contract.
  2. Diminishing Musharakah: In the Diminishing Musharaka agreement, one party will gradually transfer its share in the Musharaka to the other party so as to decrease its share in order to transfer the ownership of the venture to the other party within a specific duration. The Diminishing Musharaka is applied in the following way where Islamic bank starts a partnership with a party; with the condition that within a specific period the entire capital plus profit will be transferred to the bank; so that bank will hand over the complete ownership of the business to the partner.

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