Access over 20 million homework & study documents

finance_modelling

Content type
User Generated
Type
Study Guide
Rating
Showing Page:
1/18
MUSHARAKAH FINANCING MODEL
By: Dr Saad Al-Harran
Introduction
In the contemporary world there is always a dilemma for the entrepreneur who
has a promising idea for a new venture. How is he to raise the capital necessary
to launch the venture? Borrowing the money is probably out of question. If the
normal interest rate is 6% but the venture has a 10% chance of failing within a
year, the lender will probably charge interest at a rate of 16%. High interest, plus
amortization, will impose heavy fixed costs on the venture from the outset and
this will increase the danger of failure, and in turn the interest rate. Moreover, if
the venture's prospects can not be predicted with reasonable confidence, it will be
very difficult even to calculate an appropriate interest rate. The alternative must
be for the entrepreneur to admit a partner to the business who is entitled to
receive a portion of profits from the venture, if any, in exchange for contributing
the necessary capital to it. The partner's compensation is determined
automatically by the fortunes of the business. There is no need to compute an
interest rate and there are no fixed costs of debt, the partner will receive his
profits only if and as earned.
However, Islam aims at establishing a social order where all individuals are united
by bonds of brotherhood and affection like members of one single family. This
brotherhood is universal and not parochial. It is not bound by any geographical
boundaries and encompasses the whole of mankind and not anyone family group,
tribe or race.
The purpose of this chapter is to thoroughly examine the framework for
musharakah (equity participation) and other financial instruments of the Islamic
banks. The chapter is divided into eight sections. The first will define musharakah
and give its historical background while in the second the different types of
musharakah will be identified. The third will deal with the conditions of present
day musharakah and the fourth analyses equity financing and its channels of
investment in an Islamic society. The fifth will identify the steps to be taken to
transfer to an equity financing system and the sixth is concerned with the role of
equity financing in mobilizing funds and stabilization of the system. The seventh
section describes other financial instruments of Islamic banks. Additional
subsections are included which examine ijara (leasing), murabaha (cost plus
financing), qard al-hasanah (beneficence loans), bai muajjal (deferred payment
sale), bai salam (purchase with deferred delivery) and tadamun (solidarity).
Finally some conclusions are drawn.
The concept of brotherhood and equal treatment of all individuals in society and
before the law is not meaningful unless accompanied by economic justice such
that everyone gets his due for his contribution to society or to the social product
and that there is no exploitation of one individual by another. The Prophet aptly
warned: "Beware of injustice for injustice will be equivalent to darkness on the
Day of judgement". This warning against injustice and exploitation is designed to
protect the rights of all individuals in a society (whether consumers or producers
and distributors, and whether employers or employees) and to promote general

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/18
welfare, the ultimate goal of Islam.
Of special significance here is the relationship between the employer and the
employee which Islam places in a proper setting and specifies norms for the
mutual treatment of both so as to establish justice between them. An employee is
entitled to a "just" wage for his contribution to output and it is unlawful for the
employer to exploit his employee.
1. Definition of Musharakah & Its Historical Background
Musharakah or shirkah can be defined as a form of partnership where two or
more persons combine either their capital or labour together, to share the profits,
enjoying similar rights and liabilities.
From the very inception of human society, the 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.
The advent of the Holy Prophet saw the practice of musharakah already prevailing
over the commercial activities in Arabia. He not only ratified it, but also himself
did business on the basis of musharakah.1
After Hijra, the muhajireen and the ansar were declared by the Prophet to be
brothers. Subsequently they joined as partners, in the form of musharakah,
muzara and musaqat, in their trade and commerce. The nature of the transaction,
in the different forms, is identical. The different nomenclature in Arabic refers to
diverse activities such as muzara in agriculture, musaqat in gardening and
musharakah in trade. The musharakah of capital and labour is called mudarabah.
These four forms were so developed that they became independent institutions
and the jurists formed detailed rules about them. There is a consensus of opinion
among the jurists of all schools- of thought (including Hanfia, Maleki, Shafei,
Hanbali and Shia) that musharakah is a valid and legitimate contract in Islam.
The jurists, however differ over its form conditions and other details.
2. Types of Musharakah
Originally musharakah or shirkah (Partnership) was of two types. namely,
(a) Shirkah al-milk (non-contractual partnership)
(b) Shirkah al-uqood (contractual partnership)
Shirkah al-milk (non-contractual) implies co-ownership and comes into
existence when two or more persons happen to get joint-ownership of some asset
without having entered into a formal partnership agreement; for example, two
persons receiving an inheritance or a gift of land or property which mayor may
not be divisible. The partners have to share the gift. or inherited property or its
income, in accordance with their share in it until they decide to divide it. If the
property is divisible and the partners still decide to stick together, the shirkah al-
milk is termed ikhtiyariyyah (voluntary). However, if it is indivisible and they are
constrained to stay together, the shirkah al-milk is characterized as jabriyyah
(involuntary).
Shirkah al-uqood (contractual partnership) can, however, be considered a
proper partnership because the parties concerned have willingly entered into a
contractual agreement for joint investment and the sharing of profits and risks.
The agreement need not necessarily be formal and written, it could be informal

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/18

Sign up to view the full document!

lock_open Sign Up
End of Preview - Want to read all 18 pages?
Access Now
Unformatted Attachment Preview
MUSHARAKAH FINANCING MODEL By: Dr Saad Al-Harran   Introduction In the contemporary world there is always a dilemma for the entrepreneur who has a promising idea for a new venture. How is he to raise the capital necessary to launch the venture? Borrowing the money is probably out of question. If the normal interest rate is 6% but the venture has a 10% chance of failing within a year, the lender will probably charge interest at a rate of 16%. High interest, plus amortization, will impose heavy fixed costs on the venture from the outset and this will increase the danger of failure, and in turn the interest rate. Moreover, if the venture's prospects can not be predicted with reasonable confidence, it will be very difficult even to calculate an appropriate interest rate. The alternative must be for the entrepreneur to admit a partner to the business who is entitled to receive a portion of profits from the venture, if any, in exchange for contributing the necessary capital to it. The partner's compensation is determined automatically by the fortunes of the business. There is no need to compute an interest rate and there are no fixed costs of debt, the partner will receive his profits only if and as earned. However, Islam aims at establishing a social order where all individuals are united by bonds of brotherhood and affection like members of one single family. This brotherhood is universal and not parochial. It is not bound by any geographical boundaries and encompasses the ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Just what I was looking for! Super helpful.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4