Musharakah -
Musharakah is one of the two ideal modes of Islamic financing. The other
one being Mudarabah. Musharakah is a contractual relationship formed
through mutual consent of the parties for sharing of profits and losses in
a joint venture. Assets in the venture are jointly owned in proportion to
each partner’s contribution. The profits are shared in a pre-agreed ratio.
Losses, however, are incurred in proportion to each partner’s investment.
Islamic Bank representing share of its depositors invests funds in the
joint venture alongside other investors.
Mudarabah -
Like Musharakah, Mudarabah is also a form of
partnership. Whereas all partners in Musharakah contribute capital, under
it partnership is formed between provider of capital and provider
of expertise or human resource. Proportions for sharing profit are decided
upfront. Losses are incurred solely by the partner contributing capital.
Murabaha -
Murabaha is a non-participatory mode of Islamic
financing where the bank sells the asset required by its client to the
client on cost-plus basis. The asset is first purchased by the bank and
the bank incurs the risk of any loss or damage to the asset as long as the
asset remains under its ownership. Upon sale of the asset, the Islamic
bank is obligated to inform the client of the exact cost incurred in the
purchase of the asset and the margin of profit incorporated in the sale
price. Payment by the client of the sale price may be deferred in which
case it would become Muajjal. The selling price
once agreed cannot be changed even when the client fails to pay on the
agreed date.
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