MUSHARAKA

Musharaka refers to profit and loss sharing between the lender and the borrower completely doing away with the interest. It is an arrangement of financing in which parties offer funds, efforts, or/and skills. Profits are shared among them according to the rate agreed upon. In case of loss, only one party suffers it which is the investor. In Pakistan, the Musharaka Financing mode has been launched by commercial banks to meet their working capital requirements of the trade and industry. The banks carry out musharaka a functions out of profit and loss accounts (PLS) deposits.

The borrowers receive interest-free loan on the basis of equity participation and profit or loss from the bank or any other financial institution. The lending bank enjoys teh right of participation in the borrowers business to the limit of amount of loan. In other words, the borrower is liable to the bank (the lender) up to the limit of invested (i.e borrowed) amount. In case of profit (or loss) the lender will receive his prorate share or profit (or suffer a loss). The agreement between the investor and the company is referred to as Musharaka Investment agreement which stipulates that the operation of the musharaka will be carried out by the borrowing company. The bank as a trustee will watch, evaluate, and supervise the performance.