The structure and elements of a musharaka transaction
Produced in partnership with Morgan Lewis
The structure and elements of a musharaka transaction

The following Banking & Finance practice note produced in partnership with Morgan Lewis provides comprehensive and up to date legal information covering:

  • The structure and elements of a musharaka transaction
  • Introduction to musharaka—a profit and loss sharing instrument of Islamic finance
  • Types of musharaka
  • Shirkat al melk
  • Shirkat al aqd
  • Establishing the musharaka partnership
  • Rules for a valid musharaka partnership
  • Capital
  • Management
  • Profit and loss sharing rights
  • More...

Introduction to musharaka—a profit and loss sharing instrument of Islamic finance

A fundamental principle of Islamic finance is that of ‘no profit without risk’, ie the idea that no person should make a gain or profit unless they are contributing an element of risk. This principle is best illustrated when applying Islamic instruments of profit and loss sharing. For more information on this principle, see Practice Note: Key principles of Islamic finance.

This Practice Note will discuss musharaka, an Islamic finance instrument which was originally based on profit and loss sharing and which is analogous to a conventional partnership arrangement. In simple terms, a musharaka is a partnership that is customarily entered into between two or more parties, although not necessarily for a limited time period and most commonly for the purpose of entering into a business venture. Typically, each party to the musharaka makes a capital contribution to the venture and the profits and losses are shared between them. Another Islamic finance instrument similarly based on the principle of profit and loss sharing is mudaraba, a special kind of partnership where only one party makes a capital contribution and the other party invests in it. For more information, see Practice Note: Structure of a mudaraba transaction.

Types of musharaka

A musharaka can be formed in one of two ways depending on the subject matter of the partnership:

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