Disadvantages of Musharaka

1. It is extremely difficult to change from the system of interest based economy to that of interest free.


2. Undue interference of the lender (e.g the bank) in the borrower's business will be in place.


3. Borrowers suspect that the lender will ever share their losses.


4. The lender will suspect that the borrower will underestimate profits.


5. There will remain mistrust between the lender and the borrower.


6. The borrower's financial secrets will get open to the lender, the fact which may harm the former's business.

Advantages of Musharaka

1. It is completely in accordance with the tenets of Islam


2. Interest which is haram id ridden of.


3. It facilitates the establishment of Islamic society.


4. Conscience of Muslim is satisfied and in peace.


5. Rampant inflation may be controlled.

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.