BARRIERS IN

MUSHARAKAH FINANCING
There is an established belief that the essence of
Islamic banking is participation in the risks and
returns of investment projects and businesses
by utilizing participatory Islamic financial
contracts such as Musharakah and Mudarabah.
The practice of Mudarabah and Musharakah is
still viewed to be extremely risky.
 BARRIERS IN
MUSHARAKAH FINANCING
There are issues of financial risks, business
risks, rate of return risks, equity investment risk
in practicing Mudarabah and Musharakah
financing. The complex risks faced by Islamic
banks in applying Mudarabah and Musharakah
financing require a comprehensive risk
management, risk reporting and risk control
framework.
 BARRIERS IN
MUSHARAKAH FINANCING
Risk of Loss: Capital risk is the potential of
loss of part or all of an investment. It applies to
the whole range of assets that are not subject to
a guarantee of full return of original capital.
 BARRIERS IN
MUSHARAKAH FINANCING
• Feasibility Study: Before financing on the
basis of Musharakah, the banks and financial
institution will study the feasibility of the
proposed business for which funds are
needed. Even in the present system of interest
based loans the banks do not advance loans to
each and every applicant.
 BARRIERS IN
MUSHARAKAH FINANCING
• They study not only the financial position of the
client, but in some cases they have to examine
the potentials of the business and if they
apprehend that the business is not profitable,
they refuse to advance a loan. In the case of
Musharakah, they will have to carry out this
study at a wider scale with more depth and
precaution, but this extra work will certainly
increase their cost.
 BARRIERS IN
MUSHARAKAH FINANCING
• Dishonesty: Another hesitation against
Musharakah financing is that the dishonest
clients may exploit the instrument of
Musharakah by not paying any return to the
financiers. They can always show that the
business did not earn any profit. Indeed, they can
claim that it has suffered a loss in which case not
only the profit, but also the principal
amount will be risked.
 BARRIERS IN
MUSHARAKAH FINANCING
• There are some sectors of financing where
Musharakah can be used easily. For example,
the use of Musharakah instrument in
financing exports has not much room
for dishonesty. The exporter has a specific
order from abroad. The prices are agreed..
The payments are made through the bank
itself. The only thing to determine is the cost.
 BARRIERS IN
MUSHARAKAH FINANCING
• There is no reason in such cases why the
Musharakah arrangement should not be
adopted.
• The Clients are afraid to reveal their
true profits to the Banks, in case the
information is also passed on to the tax
authorities and Clients' tax liability increases.
 Applications of Musharakah &
Mudarabah
• Project financing techniques have become a
primary means for financing a broad range of
economic units throughout the world. The
application of these techniques has been
refined in most industrial categories and with
respect to most types of assets. Capital
participation by Islamic banks may take place
on a profit and-loss-sharing basis.
 Applications of Musharakah &
Mudarabah
• For major infrastructure projects, capital may
be raised through the Musharakh &
Mudarabah.
• Securitization of Musharakah: If a certain
project requires huge amount of investment,
which cannot be fulfilled by a few
individuals, issuing Musharakah Certificates
can fulfill the need of funds.
 Applications of Musharakah &
Mudarabah
• For Musharakah certificate represents a
proportionate share of its holder in the assets of
Musharakah and once the project is started by
acquiring substantial non-liquid assets, these
Musharakah certificate can be treated as
negotiable instrument which can be bought and
sold in the secondary market. However, trading
in these certificates is not allowed when all the
assets of the Musharakah are still in liquid form.
 Applications of Musharakah &
Mudarabah
• Export Transactions: The exporter has a
specific order from abroad. The price is
documented and the expected profits can be
calculated. Distribution of profit is at pre-agreed
rate. In order to secure himself from any
negligence on the part of the exporter, the
financer can put a condition in the contract that
it will be the responsibility of the exporter to
fulfill the conditions of L/C.
 Applications of Musharakah &
Mudarabah
• If the exporter violates the terms and conditions
of import agreement than the bank will not be
responsible for any losses that arise due to his
negligence (Rab ul Mal is not responsible for any
loss that arises due to the negligence of mudarib).
Being a partner of the exporter, the financer will
be liable to bear any loss, which may be caused
due to any reasons other than negligence or
misconduct of the exporter.