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Musharka
(Equity Participation)
or
Venture Financing
Introduction
Musharka or Shirkah can be
defined as a form of partnership
where two or more persons
combine either their capital or
labor together to share the profits
& enjoying similar rights and
liabilities.
A contract between two or more
persons who launch a business or
financial enterprise to make profit.
Condition of Musharka
Musharka is a technique of
financing used as a partnership.
Two or more parties 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.
In case of loss it is shared exactly
in the proportion of capital.
All partners have a right to
participate in managing the
project.
Any one can waive the right of
participation in favor of partner
or partners.
Historical Background Musharka
From the beginning of human society
methods to meet day to day needs have
been changing with the change of social,
economic, scientific, cultural and political
circumstances.
Especially habits, fashions and the
standard of living.
These methods regulate the commercial
activities and vary from place to place and
time to time.
The Arab society at the time of the
rise of Islam had very simple
financing methods and forms of
business peculiar to that society
Birth of Islam saw Musharka
practice in Arabia in commercial
activities.
Islam endorse and Prophet May
Peace be upon Him perform
business on the basis of Musharka.
After Hijra Muhajireen and Ansar
were declared by Prophet May Peace
be upon Him to be brothers.
Subsequently they joined as
partners on Musharka, Muzara and
Mussaqa form trade and commerce.
Nature of transactions in the
different forms were identical.
These forms were so developed that
they became independent
institutions.
Jurists formed detailed rules about
the form.
There is a consensus of opinion
among the jurists of all schools- of
thought that Musharka is a valid and
legitimate contract in Islam.
The jurists, however differ over its
form conditions and other details
Two main forms of Musharka
Permanent Musharka
In this form the parties of Musharka
participates in the equity of a project or
transaction and receives a share of profit
on a pro rata basis.
The period of contract is not specified.
It can continue so long as the will of the
parties.
This technique suits for long terms
projects as funds and development are
committed and protracted.
Diminishing Musharka –
It allows equity participation on a pro-rata
basis
System by which equity of parties keeps
on reducing ultimately the ownership of
the asset on any one or more participants
is transfers.
Partners gets dividend on their equity and
if any of the partner sell or buy other
partner some of its equity, it is allowed to
do so.
Equity held by partner progressively
reduced and at a certain time equity
held by any partner reach to ZERO.
Disposal of total equity an end of
Musharka
Musharka form of financing is being
used by Islamic banks to finance
Project Financing and Working
Capital.
Types of Musharka
Shirkah -Al-Milk (non-contractual)
It involve co-ownership and form when two or
more persons get joint-ownership of some asset
without a formal partnership agreement.
Example