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26 Jan 2012 MUSHARAKAH

In its literal sense, Musharakah means sharing, or Shirkah, which means being a partner. Musharakah is perceived as an ideal alternative for the interest based financing with far reaching effects on both production and distribution.

Musharakah is a contract between the partners to contribute capital to an enterpirse or a venture. It is a mutual contract between the parties, and thus all the mandatory agreements of a valid contract must be present. Furthermore, the capital in the Musharakah agreement should be quantified, specified, but not necessarily merged or be in liquid form. If all partners agree to work for the joint venture, each of them shall be treated as the agent of the other, in all matters concerning business. Any act carried out by a single partner, in the normal course of business, shall be deemed as authorized by all other parties.

Loss is distributed according to the ratio of investment and the profit is divided according to the agreement of the partners.


This publication provides a general overview of the elements and requirements involved in a Musharakah.





  • The partnership is fixed for such a duration that at the end of the tenure, no other business can be conducted
  • The partnership can be for a very short term, during which neither party can dissolve the partnership.




Shirkah primarily comprises Shirkah al Aqd (commercial partnership) and Shirkah al Milk (joint-ownership). Shirkah al Alq refers to partnership with commercial objective, whereas, Shirkah al Milk refers to joint ownership in particular asset.


The application of Musharakah may take different forms; Musharakah investment or Musharakah financing. Examples of Musharakah financing are structuring project financing, syndicated financing, asset financing working capital financing, contract financing, trade financing and structured products based on securitization such as sukuk. One of the common Musharakah applications in asset financing is Musharakah Mutanaqisah (diminishing




Musharakah may also be applied to acquire a stake in another entity in the form of Musharakah investment.[1]




Origination and Execution of Musharakah Agreement

  • Like any other valid contract, there should be an offer and acceptance between the partners and may be expressed by suitable documentation.
  • Party to the Musharakah contract can contract personally or hire an agent.
  • Upon the disbursement of capital, all partners’ rights to the profit and liability to losses are established.


Capital Contribution by all partners[2]

  • The Musharakah capital must be readily available;
  • The Musharakah capital must be contributed by all partners; and 
  • The capital may be in the form of monetary asset such as cash or non-monetary assets that includes tangible and intangible assets.
  • The total amount of capital to be contributed by each partner shall be determined up front. The agreed capital may be contributed on one lump sum or on staggered basis.


Once the capital is contributed, the rights  and liabilities of all asets contributed to the Musharakah venture shall be jointly and severally assumed by the partners.


Management of Musharakah venture

The Musharakah may be managed by all partners, certain partners, single partner or by a third party. Accordingly, the partner(s) who agrees to manage the Musharakah will receive a remuneration for his services in addition to his share in profit.


Profit sharing

Profit shall be measured as an amount exceeding capital after deducting cost and expenses attributable to Musharakah venture.

The profit sharing ratio may be proportionate to the capital contribution or be based on a ratio or percentage which is agreed upon all partners irrespective of their capital contribution.

It is not permissible to include a condition in the Musharakah contract that stipulates a pre- determined fixed amount of profit to one partner which deprives the profit share of the other partner.


Loss sharing

  • Loss shall be shared on the basis of pari-passu among the partners and proportionate to the capital contribution.
  • The loss to the partners shall be limited to the capital contribution of each partner.
  • Any loss due to negligence and misconduct of the partner shall be borne by that partner alone.
  • Upon realisation of loss, a partner may agree, without any prior condition, to bear the loss of another partner at the time such a loss is realised.


 Partnership venture

  • Shariah compliant business ventures of Musharakah may be conducted in various


  • Musharakah contract can also be adopted for non-commercial activities which are non profit oriented.



This means Diminishing Musharakah, where one partner or partners gruadually acquire the shareholding of the other partner through an agree redemption method during the tenure of the contract.

The transfer of Musharakah asset or share to the other party may be executed in a single payment or on staggered basis.

It involves the participation of a financer and his client, either in a joint ownership of a property/equipment or in a joint commercial enterprise. The financer’s share is further divided into several units, and it is intended that the client will purchase the financer’s units of the share, one at a time, periodically, increasing his own share, until all the units of the financer are purchased by him, so as to make him the sole owner of the property or the commercial enterprise, whichever be the case.[3]






  • Musharakah does not envisage a fixed rate of return; it is based on the actual profit earned by the ‘joint venture.’ Whereas in an interest based financing, there is a fixed rate of return on loan which is advanced by the financer, irrespective of the profit earned or loss suffered by the debtor.
  • In a Musharakah the financer can possibly suffer a loss, if the joint venture fails. Whereas in an interest based financing, the financer cannot suffer a loss.
  • The returns of a creditor in a Musharakah are tied up with the actual profits earned through the enterprise, which he/she financed. The greater the profits of the

enterprise, the higher the rate of return to the creditor. If the enterprise earns substantial profits, the creditor cannot acquire all of it, but has to share it with common people e.g. depositors in the bank. Whereas an interest based financing, results in injustice either to the creditor or debtor. If the debtor suffers suffers a loss, it is unjust on the creditor’s part, to claim a fixed rate of profit. And, if the debtor earns a high rate of profit, it is injustice to the creditor to provide him with only a small proportion of the profit, while the debtor taking the chunk of it.




Termination of Musharakah without closure of business

By way of mutual consent, one partner can buy the shares of the other.

The other ways of terminating the Musharakah are

the following:

  • If the purpose of forming the Shirkah is achieved.
  • Every partner can exercise his/her right to terminate Musharakah at any time after giving his/her partner a reasonable notice.
  • In the case of a demise of any one of the partners or any partner becoming insane or incapable of effecting the commercial transaction.
  • In the case of damage to the share capital of one partner before mixing the same in the total investment and before affecting the purchase, the partner will stand terminated and the loss will be borne by that particular partner. However, if the share capital of all partners has been mixed and could not be identified singly, then the loss will be shared by all and the partnership will not be terminated.



Our Experience


lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities. We have offices in Geneva, Dubai and Malta.

This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Mr. Dominique Lecocq on for any questions.

[1] Bank Negara Malaysia, Central Bank of Malaysia; Musharakah contract.

[2] P.g 5, Bank Negara Malaysia, Central Bank of Malaysia Musharakah Contarct.

[3] An Introduction to Islamic Fianance by Muhammad Taqi Usmani, Chap 2, p.g 82.

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