The Use of Musharaka in Practice and Current Trends

Overview

  • This Practice Note presents high-level analysis of the use and current trends of musharaka transactions.

Definitions

  • Musharaka : The Sharia-compliant profit and loss sharing partnership instrument.

  • Riba : Interest.

  • IFIs : Islamic financial institutions.

Practical Guidance

Introduction—a pure theory, a dead practice?

For a number of years, Islamic financing has been offered by both Islamic financial institutions (IFIs), as well as conventional banks. The principle of profit and loss sharing is a fundamental concept in Islamic finance as it is rooted in one of Sharia's main principles: risk taking. The primary reason is that Islamic finance deems any financing method based on riba to be non-Sharia-compliant due to the fact that contractors or parties (together the Partners) do not share in the elements of profit and loss, meaning that there is no element of equitable risk sharing in such a venture (with one party assuming more risk than the other).