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Musharaka translates to ‘partnership’ and is akin to a joint venture with the underlying principle of risk sharing between the involved parties.
With this joint venture structure, parties are able to undertake projects and finance trade that one party alone may not be able to finance.
The Shari’ah finance team has experience in this type of arrangement, specifically in its application between banks and their commercial clients.
Many Islamic banks or Islamic financing departments in convention banks use a Shari’ah joint venture (Musharaka) contract to provide working capital to support the projects and trade of their commercial clients. An example of this process is outlined below:
- Banks enter into a contract as a limited partnership with customers who lack sufficient funds to trade.
- The customer and bank jointly supply the monies for the trade and the bank issues letters of credit in support.
- To effect completion of the trade, the bank/client either sells its share in the partnership to the other on cash payment or a deferred basis (at an agreed margin) or both on-sell the imported items (or subsequent products) in the market together and share in the profits.
An illustration of the partnership (Musharaka) structure is provided below:
The Saracens Shari’ah finance team can advise clients, particularly banks and their customers considering a Musharaka partnership on the key considerations, some of which are set out below:
- Compliance with Shari’ah criteria including asset tangibility
- Ratio of profit sharing
- Setting up a business plan or preparing the underlying agreement
- Limitation of liability
- Assessing the advantages and advantages of the options such as a consecutive or diminishing partnership
If you are considering entering into a Shari’ah partnership (Musharaka), please phone our London office on +44 (0) 20 3588 3500 and talk directly to one of our lawyers. Alternatively, you can request a call back and we will be in touch at a time convenient for you.