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FIN624 Islamic Mode of Financing Assignment No 01 Spring 2019 Solution & Discussion

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Solution:
Musharakah:
Musharakah is a joint enterprises structure in Islamic finance in which partners share in the profit and losses of an enterprise. Musharakah is a type of shirkah al-amwal (or partnership) which in Arabic mean “sharing”. It is used in the same context as the term "shirk" meaning partner to Allah.

Distribution profit between Mr. Umar and Mr. Asad under Musharakah agreement:
1. The ratio of profit for each partner must be determined in proportion to the actual profit
Accrued to the business and not in proportion to the capital invested by him. E.g. if it is agreed
Between them that 'Umar' will get 1% of his investment, the contract is not valid.
2. If both partners agree that each will get percentage of profit based on his capital percentage,
Whether both work or not, it is allowed.
3. It is not allowed to fix a lump sum amount for anyone of the partners or any rate of profit tied
Up with his investment. Therefore if 'Umar' & 'Asad' enter into a partnership and it is agreed between them that 'Umar' shall be given Rs.10, 000/- per month as his share in the profit and the rest will go to 'Asad', the partnership is invalid.

4. It is allowed that if a partner is not working, his profit share can be established as less than his
Capital share.


Distribution losses between Mr. Umar and Mr. Asad under Musharakah agreement:

1. Loss is distributed exactly according to the ratio of investment.

2. All scholars are unanimous on the principle of loss sharing in Shariah based on the saying of Syedna Ali ibn Talib that is as follows: “Loss is distributed exactly according to the ratio of investment and the profit is divided according to the agreement of the partners." Therefore the loss is always subject to the ratio of investment e.g. If 'Mr. Umar' has invested 40% of the capital and 'Mr. Asad' 60%, they must suffer the loss in the same ratio, not more, not less. Any condition contrary to this principle shall render the contract invalid.

FIN624 Assignment No 01 Solution Spring 2019

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