MUSHARAKA in Islamic banking
The literal meaning of Musharaka is sharing. The root of the word “Musharaka” in Arabic is “Shirkah”, which means being a partner.
Technical meaning of the word Shirkah is that, two or more persons take part either in a property without business intention or in a business to generate profit.
USE OF MUSHARKA FOR OBTAINING DEPOSITS
Islamic banks generally use Musharaka based products for obtaining deposits.
These deposits are based on the Shariah principles of profit and loss sharing, and the Bank uses them, along with its own funds, in avenues which are compliant with the Shariah requirements.
Types of Musharakah in Islamic Banking
Shirkat has been divided into two kinds:
It means joint ownership of two or more persons in a particular property/asset.
This is the second type of Shirkah which means “a partnership effected by a mutual contract”.
Types of Shirkat-ul-Milk in Islamic Banking
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.
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.
Types of Shirkat-ul-Aqd in Islamic Banking
- Shirkat-ul-‘aqd is further divided into three kinds:
- Shirkat-ul-amwal (contractual partnership)
- Shirkat-ul-A’mal (liability partnership)
- Shirkat-ul-wujooh (vocational partnership)
Rules of Musharakah in Islamic Banking
Distribution of Profit under MUSHARAKA in Islamic banking
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.
Rules for Loss under MUSHARAKA in Islamic banking
In the case of a loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of investment.
There is a complete consensus of jurists on this principle.
Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment.
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
Difference B/w Shirkat & Mudarabah
- Investment from each partners
- Every partner can work for business
- Every partner bears loss according to ratio of his investment
- Every partner’s liability is unlimited
- Asset given by the investor as an investment, all partners will be co-owners of that asset so if value of that Asset is increased, all will get benefit.
- Investment from one partner while other is working partner
- Investor cannot work for business
- Only Rabb-ul-Mal suffers loss
- Investor is liable up to the amount of investment
- Asset given by the investor as an investment, remains in the ownership of investor before sale. Therefore, if is terminated at this stage, Mudarib is not entitled to share in the exceeding price of that asset.
What is QARD or LOAN in Islamic Banking
In Islamic Shariah, loans called Qard have only one concept as far as return thereon is concerned i.e. these are interest–free.
These are repayable in exactly equal amounts in which these are paid.
TYPES OF QARD
From characteristics, these may be divided into two types.
The first type may be called Qard and the second may be called Qard-e-Hasana.
These may be distinguish only in one manner i.e. in Qard-e-Hasana; the lender gives the debtor an option of not making the repayment in case he is unable to do that, and gives-up his option to sue for recoveries.
COMPARISON OF CURRENT ACCOUNTS IN CONVENTIONAL AND ISLAMIC BANKING
Conventional current accounts primarily offer following benefits to the customer:
Safety and unlimited withdrawal facility; and
Additional services linked to the account balance.
Current accounts in Islamic banking are generally based on the concept of Qard / loan.
In such accounts:
¨Repayment of funds can be guaranteed by the Bank; ¨ ¨Extra benefits linked to the balance cannot be offered; and ¨ Bank is liable to use the funds at its own discretion.