Definition of musharaka
Musharaka (partnership) is one of the financing contracts used by Islamic banks. A Musharaka contract is an agreement where two or more parties (for example an Islamic bank and its clients) agree to contribute to the capital - in cash or in kind, no debt is accepted - of the partnership in equal or varying amounts to establish a new project or share in an existing one.
Musharaka could be constant, where the partners’ shares in the capital remain constant throughout the period as specified in the musharaka contract or diminishing, where the Islamic bank agrees to transfer its share gradually to the other partner, so that the Islamic bank’s share diminishes and the other partner’s share increases until the latter becomes the sole proprietor of the venture.
In musharaka contracts, all parties must provide work but equality of the share of work is not a requirement. Partners may appoint workers to perform the tasks that are not within their individual share of work and the cost will be charged to the partnership. Partners are not allowed to borrow or lend money from the partnership’s funds except after securing agreement from the other partners. Musharaka partners must share profit and loss.
For musharaka contracts to be valid, they must specify, at the time of the contract, the share of each partner in the capital. The latter must also be available at the time of contract. The Islamic bank's share in the musharaka shall be measured at fair value at the time of contract and at historical cost, after contracting, at the end of each financial period until final settlement. For musharaka financing transactions that continue for more than one financial period, the Islamic bank shall recognise its share of profits or losses, for a financial period, resulting from partial or final settlement of the Musharaka.