Musharakah

What is 'Musharakah'

Musharakah is a joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

BREAKING DOWN 'Musharakah'

Musharakah plays a vital role in financing business operations based on Islamic principles, which prohibit making a profit on interest from loans. For example, suppose that an individual (A) wants to begin a business but has limited funds. Individual (B) has excess funds and wishes to be the financier in musharakah with A. The two people would come to an agreement to the terms and begin a business in which both share a portion of the profits and losses. This negates the need for A to receive a loan from B.

RELATED TERMS
  1. Islamic Banking

    A banking system that is based on the principles of Islamic law ...
  2. Shirkah

    An Islamic finance term that describes a partnership between ...
  3. Profit/Loss Ratio

    This ratio refers to a trading system's ability to generate profits ...
  4. Accounting and Auditing Organization ...

    A not-for-profit organization that was established to maintain ...
  5. Risk Graph

    A two-dimensional graphical representation that displays the ...
  6. Form 1065

    A tax document used to report the profits, losses and deductions ...
Related Articles
  1. Retirement

    Working With Islamic Finance

    There is no division between the spiritual and the secular in this type of socially responsible investing.
  2. Investing

    What Does a Creditor Do?

    A creditor is a person or entity that loans money or provides goods or services to another entity with the expectation of being paid back in the future.
  3. Markets

    Why Equity Financing Is Worth It

    When a business takes on an equity partner, it is exposed to a number of advantages that debt financing simply cannot provide.
  4. Markets

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  5. Personal Finance

    Steps to Qualify For a Small Business Loan

    Learn steps to qualify for a small business loan such as identifying financing needs, preparing a business plan and getting required documents.
  6. Markets

    Getting Government Loans For Your Small Business

    Would a government loan provide a more cost-effective way to finance your business? See whether your company qualifies for a government loan.
  7. Investing

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  8. Markets

    What Does Liquidation Mean?

    Creditors liquidate assets to try and get as much of the money owed to them as possible.
  9. Trading

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
  10. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
RELATED FAQS
  1. What is an Islamic investment policy?

    Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual ... Read Answer >>
  2. How does investing your student loans for profit actually work?

    Can you use subsidized and unsubsidized loans? How much higher does the interest rate of the investment have to be than the ... Read Answer >>
  3. What's the difference between general, limited and joined venture partnerships?

    Read about some of the important differences between general partnerships, limited partnerships and joint venture arrangements ... Read Answer >>
  4. What are the full rights of creditors in cases of bankruptcy?

    Learn more about corporate bankruptcy and the rights of creditors. Find out how creditors are repaid in the event of bankruptcy ... Read Answer >>
  5. How does a company's capitalization structure affect its profitability?

    Learn about capitalization structure and how the combination of debt and equity a company uses to fund operations can affect ... Read Answer >>
  6. What are the primary advantages of forming a joint venture?

    Learn how the advantages of entering into a joint venture make the business strategy an alternative to mergers and acquisitions ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center