Musharaka is a word of Arabic origin, which literally means sharing. In the context of business and trade, it means a joint enterprise in which all the partners share the profit or loss of the joint venture.
It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type.
is a relationship established by the parties through a mutual contract. But there are certain ingredients which are peculiar to the contract of Musharaka
, namely the role of each partner, the profit allocation and distribution scheme, and the tenor or time of the Musharaka, whether mutanaqisa or mutlaqa.
Distribution of Profit
The proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined, the contract is not valid in Shar’iah.
The ratio of the profit for each of the partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners, or any rate of profit tied up with his investment. Losses, however are assumed according to the proportion to the capital invested by each partner.