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Bai Murabaha Muajjal  |  Hire-Purchase Under Shirkatul Melk (HPSM)  |  Musharaka
The word Musharaka is derived from the Arabic word Sharikah, meaning sharing or partnership. Under Islamic law, Musharaka refers to any partnership/joint venture where two or more individuals or entities combine their capital with a mission to form a business, in which both the parties have the right to participate in the management, share the profit according to a pre-determined ratio, while the loss is shared according to the ratio of the capital or equity contribution. It is based on a mutual contract, and, therefore, it needs to have the following features to enable it to be valid:
Parties should be capable of entering into a contract (that is, they should be, interalia, of legal age).
The contract must take place with the free consent of the parties (without any duress).
In an Islamic Bank, a typical Musharaka transaction may be conducted in the following manner;
An entrepreneur approaches an Islamic bank requesting for financing, required for a project/venture/part of business.
In principle, the bank and the entrepreneur jointly provide the necessary capital required for the project.
Both the partners will have the right to participate in the management of the venture. Participation of the bank in the management may be ignored as per mutual understanding, but it will have access to all the information about the business as and when required.
The profit, derived out of the business is to be distributed between the partners, i.e. the bank and the client (entrepreneur) according to pre agreed ratio, which need not be the same as the capital or equity participation ratio.
However, genuine losses, if any, to be shared in proportion to their respective ratio of invested capital.
Sectors to use the mode of Finance: Musharaka is used in the SME & project financing
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