2. Musharakah
Musharakah is an Islamic financial term that refers to a partnership or joint venture
arrangement between two or more parties. It is a form of Islamic financing that
adheres to the principles of Shariah (Islamic law), which prohibits the payment or
receipt of interest.
In a musharakah agreement, all partners contribute capital to a business venture, and
they share both the profits and losses in proportion to their capital contributions. It is a
cooperative and participatory form of financing where the risks and rewards are
shared among the partners.
3. Types of Musharakah
Shirkah Al-’inan: This is where the partners are simply the agent and don’t serve as
guarantors of other partners.
Shirkah Al-mufawadah: This is an equal, unrestricted, and unlimited partnership. All
partners put in the same sum, have the same rights and share the same profit and loss.
Permanent Musharakah: There is no specific end date and this agreement will
continue until the partners decide to discontinue the partnership. This is often used for
long-term financing.
Diminishing Musharakah: One partner’s share is drawn down. This is while it is
transferred to another partner. It continues until the entire sum is passed over and the
whole balance is paid off.
4. Islamic Finance Musharakah-based
(Project Financing)
Project Development
Multiple parties contribute funds to develop a particular project, such as a real estate
development, infrastructure
project, or renewable energy initiative.
Ownership and Management
The partners jointly own the project and have the right to participate in its management and
decision-making.
This collaborative approach aligns with the principles of shared ownership and risk in
Musharakah.
Profit and Loss Sharing
Profits generated from the project are distributed among the partners based on the agreed-
upon profit sharing
ratio. Similarly, if the project incurs losses, these losses are shared among the partners
according to their
investment proportions.
5. Exit Strategy
The Musharakah agreement includes provisions for an exit strategy. Investors may agree on a specific
timeline or project milestone at which they can sell their shares or exit the project.
This Musharakah-based project financing model aligns with Islamic finance principles by promoting risk-
sharing and profit-sharing among the investors. It allows for collaborative investment in a large-scale real
estate development project, and the structure ensures that all parties have a stake in the success of the
venture.
It's important to note that the specific terms and conditions of the Musharakah agreement, including profit-
sharing ratios and exit strategies, would be tailored based on the negotiations and agreements among the
investors and in compliance with Sharia principles.
6. Conventional Debt-based
(Project Financing)
Loan Agreement
The project sponsor (borrower) enters into a loan agreement with a financial institution (lender).
Debt Financing
The financial institution provides a loan to the borrower, who is obligated to repay the principal amount
along with interest over a predetermined period.
Collateral
The project's assets and cash flow serve as collateral for the loan. If the borrower defaults, the lender may
have recourse to these assets.
7. Interest Payments
The borrower makes regular interest payments to the lender in addition to repaying the principal amount.
Fixed Repayment Schedule
A fixed repayment schedule is established, outlining specific amounts and timing for principal and interest
payments.
Exit
The exit strategy involves repaying the loan according to the agreed-upon schedule. The lender typically does
not share in the project's future profits.
8. Comparison
Islamic Finance Musharakah-
based (Project Financing)
Musharakah is an Islamic financing
concept that involves a partnership or
joint venture between two or more
parties.
In the context of project financing,
musharakah implies a partnership where
all partners contribute capital and share
both the profits and losses of the project.
The financier is not just a lender but a co-
owner in the business venture.
Conventional Debt-based
(Project Financing)
Debt financing involves borrowing funds
from a lender with the obligation to repay
the principal amount along with interest
over a specified period.
The borrower retains ownership and
control of the project, and the lender's
involvement is limited to providing funds.
