The Musharakah is an association between two or more parties in the capital of a company, project or operation by means of an apportionment of the results (losses or profits) in agreed proportions. It is based on the client’s morality, the relationship of trust and the profitability of the project or operation.
The Musharakah, as practiced by the new Islamic Banks such as ours, is most often in the form of a contribution to the financing of specific projects or operations proposed by the clientele. As in Modaraba, this funding can be made with or without disbursement. But it can also take more elaborate forms.
In any case, this contribution shall be made in accordance with the Bank participates in the financing of the project in a sustainable manner and regularly receives its share of the profits in its capacity as co-owner. In the case of the Bank, this means long-term or medium-term employment of these stable resources (equity, allocated and non-allocated participating deposits, etc.). The Bank’s contribution may take the form of an acquisition of a stake in existing companies, a contribution to the increase of its share capital or a contribution to the formation of the capital of new companies (purchase or subscription of Shares or shares). This type of Musharakah corresponds in the traditional banking practices to the stable investments that the banks make either to help the formation of companies or simply to s’ Control of existing companies.
The Musharakah Digressive
The Bank participates in the financing of a project or an operation with the intention of withdrawing gradually from the project or the operation after its total disinterestedness by the promoter. The latter shall pay to the Bank, at regular intervals, such part of the profits accruing to the Bank as it may set aside part or its own entire share to repay the capital contribution of the Bank. After the recovery of all of its capital and profits that accrue, the Bank withdraws from the project or operation. This formula is similar to temporary holdings in conventional banking.
Benefits of the Using Musharakah in Business
The financing by Musharakah with its flexibility and its participatory vocation has several advantages and for the Islamic Bank and for the economic operators. For Islamic Bank, this formula offers opportunities for long- and / or medium-term investment of its resources.
It can thus constitute a source of regular and consistent income which will enable it to provide its depositors and shareholders with a fairly attractive rate of remuneration.
In addition to the one-off financing of short-term commercial transactions (notably for resale in the state or for import-export) and the acquisition of participation, Musharakah also presents itself as a form of long- and medium-term credit. In this respect, it is the most appropriate way of financing the needs of business start-up and development cycles both in terms of capital formation and / or capital growth and the acquisition and / or renovation of equipment. Also, the Musharakah is much sought after by promoters for the creation of small and medium enterprises in the form of companies of various forms.
For economic operators (partners), the principle of risk sharing makes Musharakah an attractive source of financing. The remuneration of the Bank, far from constituting a fixed financial expense, is a variable contribution directly linked to the operating result. In the event of a deficit, Not only can the Bank not be entitled to any remuneration but it is also obliged to bear its share in the loss in its capacity as partner. That is to say the importance of the study of the risk and profitability of the projects and operations proposed for this type of financing.
The Musharakah of decreasing type allows the Islamic Banks to grant to the holders of public contracts (or others), advances on markets by means of a division of the margin released on the costs of realization. Payments will be based on work situations supported by all supporting documentation. The deduction shall be made on the payments made by the contracting authority through the paying accountant under the terms of the contract, Act of market collateral to be systematically requested in such transactions. Nevertheless, the Shari a requirements in this regard should be taken into account (see below).
Competitions by Musharakah also meet the financing needs of small entities in the craft sector, hotels, restaurants and other types of activities which, despite their weaknesses in terms of guarantees and financial resources, have a clear cultural interest. These sectors generally benefit from tax advantages and stable and faithful demand which largely offset the aforementioned disadvantages.
Some countries with an old banking tradition have favored the development of banks specializing in financing such activities and operating in a participatory manner (popular banks).
Conditions Musharakah in Islamic Financing
- The contribution of each party must be available at the time of completion of the transaction being financed. However, the Shari a authorizes the Musharakah in transactions benefiting from deferred payment, provided that each of the two parties assumes part of the commitment vis-à-vis the supplier. The contribution of the Islamic Bank in this form of Musharakah generally consists of the issuance of a bank guarantee (downstream, documentary credit, letter of guarantee, bond on market etc.).
- Each of the two parties must accept the principle of participation in the profits of the funded company. Any agreement to guarantee to one of the parties the recovery of its assistance independently of the results of the operation is null and void. In this regard, the Bank has the right to claim reimbursement of its contribution only in the event of violation by its partner of any clause in the Musharakah contract, serious negligence in the management of the case (by reference to Rules in the matter), and cases of bad faith, concealment, breach of trust and other similar acts.
- The Bank may request from its partner the provision of guarantees, but it may only be used for one of the above-mentioned acts.
- The key to the distribution of the profits between the two parties must be explicitly agreed upon at the conclusion of the contract in order to avoid any cause of litigation. If the share of each party in the profits is freely negotiable, the sharing of the possible losses must be done in the same proportions of profit sharing according to the principles, the gain in compensation of the loss.
- Sharing of profits can only take place after profits are actually realized (no anticipation of the results). Advances may nevertheless be levied by mutual agreement between the parties concerned, with regularization at the close of the Musharakah or the exercise, as the case may be).
The goods and services, the object of Musharakah, must conform to the prescriptions of Islam.