What is "musharaka"

Musharaka, or Sharika or Shirkat ( Arabic: مشاركة or شركة ) meaning partnership, is an Islamic mode of finance in which capital is provided by two or more parties for project development. Banks can provide financing to a project with equity rather than a fixed-interest loan, which most pious Muslim consider haram (forbidden). The profits of the project are shared among the investing parties on the basis of their participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation. The difference between musharika and mudaraba is that in musharika, all involved parties provide capital to share in the profit or loss of the project. In mudaraba, one party provides the capital and the other acts as an agent to invest it. The agent in a mudaraba does not share in the losses.

Equity finance is considered the backbone of Islamic banking. Yet, in the last two decades, debt finance, i.e., short-term murabaha, has been the most popular mode of financing for Islamic banks. With the growing demand for long-term financing, some Islamic banks are beginning to get involved in providing musharika financing for projects. In 1997, the Saudi British Bank provided a U.S.$72 million musharika facility to the Abdul Lateef Jameel Group, Saudi Arabia, which provided financing to individual clients for the purchase of Toyota cars. The musharika is essentially unsecured funding and exposes banks to a higher risk than that faced through murabaha or ijara, where the funding is secured by the asset. However, the risk in the musharika can be mitigated by choosing an appropriate security structure.