The use of musharaka in practice and current trends
Produced in partnership with Morgan, Lewis & Bockius LLP
The use of musharaka in practice and current trends

The following Banking & Finance guidance note Produced in partnership with Morgan, Lewis & Bockius LLP provides comprehensive and up to date legal information covering:

  • The use of musharaka in practice and current trends
  • Introduction—a pure theory, a dead practice?
  • Issues with using musharaka as an instrument
  • Market trends

Introduction—a pure theory, a dead practice?

For a number of years, Islamic financing has been offered by both Islamic financial institutions (IFIs), as well as conventional banks. As discussed in Practice Note: The structure and elements of a musharaka transaction, the principle of profit and loss sharing is a fundamental concept in Islamic finance as it is rooted in one of Shari’ah’s main principles: risk taking. The primary reason is that Islamic finance deems any financing method based on riba (interest) to be non-Shari’ah-compliant due to the fact that contractors or parties (together the Partners) do not share in the elements of profit and loss, meaning that there is no element of equitable risk sharing in such a venture (with one party assuming more risk than the other).

Musharaka (the Shari’ah-compliant profit and loss sharing partnership instrument) is, alongside mudaraba, one of the few instruments of Islamic finance that is almost exclusively based on the profit and loss sharing model. It is believed that this concept of profit and loss sharing has given musharaka a reputation, within the Islamic banking industry, as one of the purest forms of Islamic financing.

However, there has been a rise in criticism of the modern practical uses of musharaka which has rendered it in practice to be much less credible, hence also