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Finance by Musharaka

Financing through Musharaka is an Islamic finance products under which the Bank provides the required funds, becomes a partner in the finance subject project, and shares the profits expected out of it pursuant to agreed terms and rules of distribution while each partner assumes loss on pro rata basis. There are a number of Musharaka financing techniques, such as:

  • Permanent Musharaka

In this type of Musharaka, the bank's share interest remains unchanged in terms of amount and the bank continues to receive its proportional dividends so long as the partnership exists.

  • Temporary Musharaka

This form of financing is designed to finance the working capital under which the bank enters as a partner for a specified period and receives its share of dividends and its principal equity contribution at the end of the contract. However, a temporary Musharaka contract may be renewed pursuant to a mutual agreement of the two parties.

  • Shrinking Musharaka

In a shrinking Musharaka, the bank's interest share decreases by the payments received from the customer and the bank's share of the profit is calculated on the basis of the outstanding interest share.

Musharaka Finance Process

The bank agrees with the customer to finance a business transaction by entering into it as a partner. The terms of Musharaka provide that the bank shall sell its share interest to the customer at the end of the partnership. Each partner may sell its share interest to the other partner or to a third party by virtue of a separate contract pursuant to then mutually agreed terms between the two partners including the rate profit rate, method and terms of payment, guarantees, and other terms, subject to the Sharia applicable rules and controls.

Sharia Controls

  • The equity contribution must be paid in cash. Any form of equity may not be accepted unless liquidated and converted into cash.
  • The equity contribution should not necessarily be readily available at the time of signing the contract; it must be readily available when implementation of Musharaka commences.
  • Management could be undertaken by one or more of the parties in return for a percentage of the profits.
  • Any loss or damage sustained by the Musharaka based project, except as a result of gross negligence or transgression, shall be shared by the parties proportionately.
  • Profits shall be distributed as agreed by the partners provided that the share is predefined and known to them as a percentage, such as one quarter or one third or otherwise.
  • A partner's interest share of the capital must be converted into a commodity should it wish to sell it to another partner. A partner may sell its interest share at any profit margin of its discretion.
  • A share interest may not be sold before having been legally and duly possessed and owned.

Features of Musharaka

  • The customer may act as the bank's agent in performing the Musharaka process thereby allowing the customer, by virtue of its experience and expertise, sufficient flexibility to complete the formalities and custom duty requirements.
  • This type of finance is suitable for customers who wish to receive the commodity documents in their names whether to serve their relationship with their suppliers or because they have certain concessions (custom exemptions for example).
  • The bank's entry with customer as a financier partner to the purchase transaction, "commodity purchase", is an evidence of seriousness and commitment to the partnership.
  • Musharaka financing is one of the most Sharia flexible and comprehensive forms of finance by virtue of the fact that it befits all finance requirements of various economic activities.
  • Musharaka is an ideal instrument to finance fixed assets purchases in commensurate with the bank's credit policy, which is based on the customer participation in the financing transaction of such assets.
  • The bank may discontinue the partnership in one stroke so it becomes wholly owned by the customer.
  • The bank may sell its share interest to a third party should the customer withdraw and decides not to purchase the subject commodity.
  • Pre-maturity partnership termination option mitigates the risk related to investment term.

Scope of Musharaka Applications

Musharaka form is used for contingency financing (commodity, goods, equipments) requirements of bank corporate customers of different business sectors, for different maturities and multiple purposes including, in addition to working capital, purchase of fixed assets. The banks usually extends to customers special Musharaka credit facilities the of which is determined based on the type of business and the purpose of finance. Each customer is assigned certain credit line either in the form of Musharaka contract/ contracts which are used for one time or in the form of revolving Musharaka usable more than once during the terms of the facility.​