Principles of Musharakah and Mudarabah

Principles of Musharakah and MudarabahMusharakah and Mudarabah written in the books of Muslim fiqh generally means contracts which argon form for starting a joint venture in which all partners figure in the clientele from starting till end when assets are liqui catchd. The books of Islamic fiqh were written in an environment when there were only small trades and no large scale taskes took place. The principles of Musharakah and Mudarabah croupe be applied to small as well as large scale commercial enterprises. The basic principles of Musharakah and Mudarabah are as followsMusharakah and Mudarabah finance is non interest basedFinancier /investor essential package loss to the extent of their enthronementProfit is distributed according to the agree ratio with their vernacular consent, but the sleeping partner gear submit more than the ratio of his investmentLoss suffered by partner is simply according to the proportion of his investmentFor financing a project, the tradi tional regularity of Musharakah and Mudarabah can be easily applied. If a Financier wants to pay the social unit project, he can use Mudarabah financing and if some parties want to finance the project jointly, they can adopt Musharakah financing.It is very easy to evaluate the large(p) if the Musharakah or Mudarabah have been effected since inception of the project. In baptismal font of Musharakah if some(prenominal) partner wants to withdraw from the business, the other partners can purchase his bundle at an agreed ratio. The partner can thus either fully birth the business on his own or can sell the share of the partner who withdrew his capital to other person who can substitute the withdrawing financierSecuritization of MusharakahMusharakah financing can be securitised easily, in case of big projects a huge core group is ask which a few people cant afford. Every person investing is given a Musharakah certificate which represents the add of specie he has invested in b usiness. After the start of the business and acquire non liquid assets, the certificates can be hardened as negotiable instruments which can be sold in the secondary markets. However, if all the assets of Musharakah are in liquid form, buying and exchange of these certificates is non allowed because as all the assets are in liquid form and exchange of such(prenominal) assets means exchanging m iy for money, and for exchanging money for money both must be equal. Access from every side is Riba, which is prohibited in IslamIn case if the money invested is invested in non-liquid assets as land, machinery etcetera the Musharakah certificate pass on represent the portion of possession in those Assets. In this of assets being in non-liquid form, it will be allowed by the shariah to sell certificates in the secondary market on either price agreed upon by the parties with their mutual consentIn case the assets in the business are a mixture of liquid and non-liquid assets more or less of the schools of thoughts including shafii have allowed trading only if the size of non-liquid assets in the whole business is more than 50%. However, if the Hanafi view is adopted, transaction if valid even if the non-liquid assets are less than 50% but the bill must be greater than liquid assets and non-liquid assets must not be negligibleFinancing of a individual transactionThe principles of Musharakah and Mudarabah can be easily use for financing a single transaction. It can be applied for fulling solar day to day needs of small traders as well as for import and merchandise transactions. An importer can approach financier for financing him for importing goods for a single transaction. Banks can also finance for importing goods. If the letter of credit has no restrictions, Mudarabah can be followed and if the letter of credit has restrictions, Musharakah suits for such case. After selling the imported goods, the sales proceed can be shared by the financier and the imported on an agreed ratioWhen finance is required for working capital of a already streak business, the principles of Musharakah can be applies in the following waysBefore investing in the running business the capital of the business can be evaluated by the mutual consent. As according to Imam Malik, non-liquid assets can also form a part of capital so, this view can be applied here. The harbor of the already running business will be the share of one partner and the amount of investment by the financier will be his share. The boodle given to the financier is agreed upon by both the parties which should not exceed the amount of his investment. The Musharakah can be for a limited rate of flow of time ilk 6 months, one year, two years, after the shutdown of the term both the liquid and non-liquid assets are evaluated again and profit whitethorn be distributed on the basis of evaluationSharing of gross profitFinancing by the method above can be very difficult in case the business is big and has large turn of fixed assets, because the valuation of the assets, their appreciation or depreciation whitethorn compose accounting problems which can cause disputes among partners. In this case Musharakah may be applied in another wayIn this scenario, difficulty tog out due to calculation of collateral expenses like salary of staff, depreciation of machinery etc. For solving such problem only direct expense like raw material, labour, etc. Shall be borne by the Musharakah. It means all the indirect expenses shall be borne by the industrialist and instead of net profit, gross profit shall be shared among the partners. In order to compensate the industrialist, the percentage of his profit may be increasedRunning musharakah account on the basis of perfunctory productsMost of the financial institutions finance working capital by beginning a running account from where the client draws the money at various intervals and returns surplus money. This process of credit and debit g oes on and up to date of maturity. interest is calculated on the basis of periodic productsFor making such arrangement possible for Musharakah Financing, following procedure may be suggestedA portion of the positive profit must be used for counseling of the businessA portion of the profit must be used for paying the investorsLoss must be borne by the investor in the take in ratio of their investment in the businessThe average of the contribution make to the musharakah account on daily basis must be treated as the share capital of the financierProfit acquire at the end of the term must be calculated on daily product basis, and must be distributed among the partners accordinglyIf parties allow such arrangement, it does not seem to violate any principles of Musharakah However, this needs to be looked into by the experts of Islamic jurisprudence. Practically, it means the parties have agreed to the principle that the profit earned at the end of the agreed time will be divided by th e capital utilized per day. Which will lead to average of money earned on daily. The amount of money earned per day will wherefore multiplied by the total number of days the money is invested by the partner for the calculation of his actual profitSome of the scholars do not allow this method as this method does not reflect the calculations of the actual profit earned by a partner of the Musharakah. The business may have earned a huge profit during the time a partner had no investment at all or share of his investment would be negligible but he will be paid at par with the other partners who had invested a huge sum of money. Similarly, the business may have suffered a great loss when a particular partner had invested huge amount of money and he will pass on loss to the other partners despite of their no investment during the loss or having invested negligible amount of moneyThe answer to the dividing line is that it is not necessary for the partners in Musharakah that they earn pro fit on the amount of their investment only. Once the Musharakah takes place the profit earned by the business are earned by all the partners despite whether their money in invested in the business or not. This is generally true for the Hanafi school of thought, which does not make it necessary for a Valid Musharakah that the money invested by the partners are together mixed up