2. Introduction
Musharakah ” means “Sharing” in the terminology of
Islamic Fiqh.
The word Musharakah has been derived from
“Shirkah” which means being a partner
Musharakah is basically a kind of partnership in which
the partners join together with different contributions,
work or obligation for the common objective of
undertaking business and trade in accordance with the
principles of Shariah.
4. Shirkat has been divided into two kinds:
SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a
particular property/asset.
SHIRKAT-UL-’AQD
This is the second type of Shirkah which means “a
partnership effected by a mutual contract for ”.
5. SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a
particular property.
This kind of “Shirkah” may come into existence in two
different ways:
> Optional Shirkat-ul-Milk (Ikhtiari)
>Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)
6. OPTIONAL SHIRKAT-UL-
MILK (Ikhtiari)
If two or more person purchase an equipment, it will be
owned jointly by both of them and the relationship
between them with regard to that property is called
“Shirkat-ul-milk.”
Here this relationship has come into existence at their
own option, as they themselves elected to purchase the
equipment jointly.
7. UNOPTIONAL SHIRKAT-
UL-MILK (Ghair Ikhtiari)
There are cases where this kind of “Shirkah” comes to
operate automatically without any action taken by the
parties.
For example, after the death of a person, all his heirs
inherit his property which comes into their joint
ownership as an automatic consequence of the death of
that person.
8. SHIRKAT-UL-’AQD
This is the second type of Shirkah which means:
“A partnership effected by a mutual contract in which
the partners join together with different contributions,
work or obligation for the purpose of earning profit”.
Shirkat-ul-‘aqd is further divided into three kinds;
• Shirkat-ul-amwal (Partnership in Trade “Capital”)
• Shirkat-ul-A’mal (Partnership in Services “Labour”)
• Shirkat-ul-wujooh (Partnership in Goodwill)
9. Shirkat-ul-amwal (Partnership
in Trade “Capital”)
Where all the partners invest some Capital into a
Commercial enterprise.
It is the most important & commonly used form of
Shirkat
10. Shirkat-ul-A’mal (Partnership
in Services “Labour”)
Where all the partners jointly undertake to render some
services for their customers.
The fee charged from them is distributed among them
according to an agreed ratio.
If two persons agree to undertake tailoring services for
their customers on the condition that the wages so
earned will go to a joint pool which shall be distributed
between them irrespective of the size of work each
partner has actually done.
11. Shirkat-ul-wujooh
(Partnership in Goodwill)
The word Wujooh comes from Wajahat meaning
goodwill. Hence this is a partnership in Goodwill
Here the partners contribute in the business not
through capital but through their goodwill and share
profit at an agreed ratio
All they do is that they purchase the commodities on a
deferred price and sell them at spot. The profit so
earned is distributed between them at an agreed
12. Basic rules of musharakah
Musharakah means relationship established under a
contract by the mutual consent of the parties for sharing
of profits and loses, arising from a joint enterprise or
venture.
Investments come from all partners / shareholders
hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually
agreed in the contract.
13. The existence of Muta’aqideen(Partners):
Capability of Partners:
• Must be sane & mature and be able of entering into a
contract.
• The contract must take place with free consent of the
parties without any fraud or misrepresentation.
14. Asset of Musharakah
All assets of Musharakah are jointly owned in proportion to the
capital of each partner.
Capital of Musharakah
All partners must contribute their capital in terms of money or
species at an agreed valuation.
Share capital in a Musharakah can be contributed either in cash or
in the form of commodities. In the latter case, the market value of
the commodities shall determine the share of the partner in the
capital
15. Profit sharing views
Imam Malik & Imam Shafi'i
it is necessary for the validity of musharakah that each partner
gets the profit exactly in the proportion of his investment.”
Imam Ahmed
The ratio of profit may differ from the ratio of investment if it is
agreed between the partners with their free consent.
Imam Abu Hainfah
The ratio of profit may differ from the ratio of investment in
normal conditions
16. Distribution of Profit
The ratio of profit distribution must be agreed at the time of
execution of the contract
The ratio must be determined as a proportion of the actual
profit earned by the enterprise
Not as percentage of partner’s investment
Not in lump sum amount
A sleeping partner cannot share the profit more than the
percentage of his capital.
17. ILLUSTRATION
If A and B enter into a partnership and it is agreed between
them that A shall be given Rs. 10,000/- per month as his share
in the profit, and the rest will go to B, the partnership is
invalid.
Similarly, if it is agreed between them that A will get 15% of
his investment, the contract is not valid.
The correct basis for distribution would be an agreed
percentages of the actual profit accrued to the business.
18. Musharakah financing under
AAOIFI
There are three general conditions for Musharakah,
namely;
(i) Capital of Agency (Al-Wakalah)
The transaction contracted for in the musharakah must
be capable of accepting the principle of agency or al
wakalah
19. (ii) The Fixing of the Ratio of Profit-Sharing
The ratio for the distribution of profits must be determined
in advance.
This is because; the distribution of profit is part of the
subject matter of the contract.
(iii) The Profit-Sharing must be in Ratio not Fixed Amount
In pre-fixing the profit-sharing, a fixed amount must not be
specified.
This is because, the expected profit from the musharakah is
still not known.
20. According to AAOIFI FAS 4, recognition of the Islamic
bank’s share in Musharakah capital (cash or kind) shall
be recognized when it is paid to the partner or made
available to him on account of the Musharakah.
Expenses of the contracting procedures incurred by one
or both parties (e.g., expenses of feasibility studies and
other similar expenses) shall not be considered as part
of the Musharakah capital unless otherwise agreed by
both parties.
22. Balance Sheet
Musharakah Financing * XX
Less: Provision for loss in Musharakah Financing (XX)
Net Musharakah Financing XX
Income Statement
Musharakah Income XX
23. Musharakah financing model
Phase 1:
The client approaches the bank with detailed business
plan, roles and responsibilities, profit and loss sharing
percentage, etc. to start a ne business venture.
Phase 2:
the bank will do the necessary valuation based on the
documentation and other necessary information
provided by the customer.
24. Phase 3:
Upon successful review, the customer and the bank will sign a
Musharakah agreement to set up business venture.
Phase 4:
The customer and the bank will contribute the capital (50:50 ratio).
Phase 5:
In the event there is profit from the business venture, the profit will
divided between two party (50:50).
Phase 6:
In the event loss from the business venture, the loss will divided
into two parties.
25. Example 1
A customer approached to bank to provide Musharakah
financing agreement of a business venture at 50/50
share of capital. Journalize the following transactions?
The bank provided the partner a $50,000 share of the
agreement to the partner.
After a year, the venture incurred a loss of 25,000$
The next year the venture made a profit of $20,000
The Musharakah is terminated and partners repaid
26. Example 1
Bank Shari’ah provides musharakah agreements
financing to Moonway Corporation for house
developing project amounting to RM10,000,000. The
term of financing is for 5 years. The profit sharing ratio
is agreed at 30: 70 (Partner: Bank). The profits or
losses from the project as disclosed by the partner are as
follows:
27. Exercise 1
A customer opened a Wadiah account from a local Islamic bank and
deposited 20,000$
The bank and the customer agreed to Musharakah financing of
business venture
The bank provided a share of $80,000 for his share of capital and
customer shared a 20,000$
The venture got a profit of 50,000$ after a year and the
Next year venture incurred a loss of 60,000$
After, the Musharakah agreement is terminated and each is repaid
28. Example 2
A bank and customer provided a Musharakah
agreement of a venture and provided a capital share of
70,000$ from the bank and 30,000$ from the customer
The profit share ratio is 80% for bank and 20% for the
partner
The venture made a profit of 60,000$
The venture incur a loss of 30,000$
Calculate the share of profit and loss
29. Exercise
A two banks provided a Musharakah agreement of a
business venture. Bank A provided a capital share of
45,000$ and bank B 55,000$. Two banks agreed a profit
share ration of 60% for A and 40% for B
The venture incurred a loss of 45,000$
The venture made a profit of 65,000$
Calculate the share of profit and loss?
30. Exercise 2
Bank Sharia provides Musharakah agreements financing to
Moon-way Corporation for house developing project amounting
to RM10,000,000. This amount represents 60% of the total cost of
the project. The term of financing is for 5 years. The profit
sharing ratio is agreed at 30: 70 (Partner: Bank). The profits or
losses from the project as disclosed by the partner are as follows:
31. Year Profit / (Loss)
1 (1, 500,000)
2 (1, 000,000)
3 2,500,000
4 1,500,000
5 1,000,000
You are required to determine the profits or losses based to
be recognized by both Bank Shari’ah and Moonway
Corporation from Year 1 to Year 5.
32. Example 3
Islamic bank provides $ 1,500,000 Musharakah contract
financing to Hams provide 1,000,000 for SME project
amounting to $ 2,500,000. The term of financing is for 6
years. The profit sharing ratio is agreed at 35: 65
(Hamse: Islamic Bank). The profits or losses from the
project as disclosed by the partner are as follows:
33. Year Profit / (Loss)
1 (500,000)
2 (200,000)
3 50,000
4 100,000
5 250,000
6 300,000
You are required to determine the profits or losses based to be
recognized by both Bank Shari’ah and Moonway Corporation
from Year 1 to Year 5
34. Diminishing Musharakah
Financing Model
Phase 1:
The cleint appoaches the housing developer/seller and
identifies the house or asset he wishes to buy.
Phase 2:
The seller provides the price quotation, terms and
conditions and other relevant details requested by the
customer.
35. Phase 3:
The customer approaches the bank along with the necessary
supportive documents on the asset for financing using
diminishing musharakah as an underlying contract.
Phase 4:
The bank will sign a diminishing musharakah contracts with
terms on profit sharing, loss sharing, monthly rental
payment.
36. Phase 5:
The customer and the bank contributes the capital (90:10) to
own the house and share the responsibilities as per agreed.
Phase 6:
The house is leased to the customer by the bank based on the
agreed rental terms in the contracts.
Phase 7:
the customer pays the rental along with the fixed capital
share based on the agreed payment plan
37. Phase 8:
The periodic rental amount will be jointly shared between the
customer and the bank according to the percentage share holding at
the particular time. The customer sharing ratio will increase after
each rental payment.
Phase 9:
The transfer of ownership of the house is upon the entire payment
of rental and the bank capital share. The house is fully-owned by
the customer.
38. Examples
Bank Shari’ah provides musharakah mutanaqisah
financing to Moonway Corporation for house
developing project amounting to RM10,000,000. This
amount represents 60% of the total cost of the project.
The term of financing is for 5 years and the partner is
required to pay back the bank in 5 equal installments
yearly. The profit sharing ratio is agreed at 30: 70
(Partner: Bank) and assumed to be constant for the first
2 years of the project.
39. For the next three years, the profit sharing ratio is
agreed to be 20: 80. The profits or losses from the project
as disclosed by the partner are as follows:
Year Profit / (Loss)
1 (1, 500,000)
2 (1, 000,000)
3 2,500,000
4 1,500,000
5 1,000,000
You are required to determine the profits or losses
based to be recognised by both Bank Shari’ah and
Moonway Corporation from Year 1 to Year 5.
40.
41. Bank Shari’ah Malaysia Berhad provided working capital to
Tijarah Construction Sdn. Bhd. based on the principle of
musharakah mutanaqisah amounting to RM400,000. Profit
and loss sharing ratio as agreed by both parties is similar to
the ratio of capital contribution which is 30:70 (Bank:
Customer) at the beginning of the contract. The repayment
shall be equal throughout the contract period. However,
Tijarah Construction had financial difficulties during year 2
and thus only managed to pay 50% of the agreed repayment
amount.
42. Half of the amount outstanding in year 2 has been paid
in year 3 and another half was paid in year 4. Tijarah
Construction also experienced financial difficulties in
year 4 whereby the repayment outstanding at the end of
the year was amounting to RM35,000.
The profit and loss for the above project is as follows:
Year 1 Profit of RM180,000
Year 2 Loss of RM150,000
Year 3 Profit of RM220,000
Year 4 Loss of RM80,000
45. Monthly periodic capital payment:
I[TE-(1+i)n CE]
(1+i)^n-1
I= periodic profit rate that obtain the annual percent rate
divided by 12 x 100
TE= total equity
CE= customers initial equity
N= total number of periodic capital payment
46. Example 1:
Ahmed wishes to buy a house priced at 500,000 $ and
he is willing to pay 10 per cent of the price as part of his
capital. He is also willing to opt for the leasing. The
islamic bank agrees to fund the 90 per cent, i.e.
remaining 450,000 $, and the current prevailing rent for
similar houses in the locality is 2,500 . Ahmed wants to
buy back capital portion of the bank in 20 years.
47. STEP1: find to Annual rate of
return ?
Given:-
R= 2,500
T=12 months
TE= 500,000
R*100*T=
TE
=(2,500*100*12)/500,000
=(3,000,000)/500,000
= 6%
50. Exercise
Yusuf wishes to buy a machine priced at 150,000 $ and
he is willing to pay 25 per cent of the price as part of his
capital. He is also willing to opt for the leasing. The
islamic bank agrees to fund the 75 per cent, i.e.
remaining 112,500 $, and the current prevailing rent for
similar machine in the locality is 800$ . Yusuf wants to
buy back capital portion of the bank in 15 years.
find to Annual rate of return ?
find the monthly periodic capital payment?
