Musharakah
Musharakah is a partnership in which each party contributes capital to a venture. Profit is shared at an agreed ratio, while losses are borne in proportion to each partner's capital contribution.
Also called: musharaka · sharikah · Islamic partnership · joint venture
Partners may agree a profit ratio that differs from their capital shares, for instance to reward the partner who does more of the work. Losses are different: they follow capital, so a partner who put in 30 per cent of the money bears 30 per cent of any loss. No partner may be guaranteed a fixed return.
Musharakah is often described as the purest form of Islamic finance, because the financier shares in the outcome of the business rather than earning a return for time. It is also the hardest to run at scale: it needs monitoring, profit measurement and exit arrangements that a debt-style product does not. In banking practice it most often appears as project or working-capital finance, in investment vehicles, and in its home-finance variant, musharakah mutanaqisah.
In practice
A partner cannot be guaranteed its capital by the other partners. A clause promising one partner a fixed profit, or a buy-back at original cost regardless of value, undermines the partnership.
Example
A bank contributes US$600,000 and a developer US$400,000 to a project, agreeing to split profit 50:50 because the developer manages it. If the project makes US$200,000, each gets US$100,000. If it loses US$100,000, the bank bears US$60,000 and the developer US$40,000.
Commonly confused with
| Term | How it differs |
|---|---|
| Mudarabah | In mudarabah only one party contributes capital and the manager contributes work; in musharakah all partners contribute capital. |
See also
- MudarabahMudarabah is an investment partnership in which one party provides the capital and the other provides the management. Profit is shared at an agreed ratio; financial loss falls on the capital provider unless the manager was negligent or in breach.
- Musharakah MutanaqisahMusharakah mutanaqisah is a diminishing partnership: a financier and a customer co-own an asset, the customer pays rent for using the financier's share and gradually buys that share until it owns the asset outright.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.