The concept of Musharakah and Mudarabah is based on some basic principles. As long as these principles are fully complied with, the details of their application may vary from time to time. Let us have a look at these basic principles before touching the details.
(1) Financing through Musharakah and Mudarabah does never mean the advancing of money. It means participation in the business and in the case of Musharakah, sharing in the assets of the business to the extent of the ratio of financing.
(2) An investor/financier must share the loss incurred by the business to the extent of his financing.
(3) The partners are at liberty to determine with mutual consent, the ratio of profit allocated to each one of them, which may differ from the ratio of investment. However, the partner who has expressly excluded himself fro the responsibility of work for the business can not claim more than the ratio of his investment.
(4) The loss suffered by each partner must be exactly in the proportion of his investment.
Project financing:
Keeping in mind these basic principles project financing is discussed below.
In the case of project financing, the traditional method of Musharakah or Mudarabah can be easily adopted. If the financier wants to finance the whole project the form of Murabahah can come in to operation. If investment comes from both sides, the form of Musharakah can be adopted. In this case, if the management is the sole responsibility of one party, while the investment comes from both, a combination of Musharakah and Mudarabah can be brought in to play according to the rules already discussed.
Working capital:
The capital of the running business may be evaluated with mutual consent. The value of the business can be treated as the investment of the person who seeks finance, while the amount given by the financier can be treated as his share of investment. The Musharakah may be affected for a particular period, like one year or sex months or less. Both the parties agree on a certain percentage of the profit to be given to the financier, which should not exceed the percentage of his investment, because he shall not work for the business. On the expiry of the term, all liquid and not-liquid assets of the business are again evaluated, and the profit may be distributed on the basis of this evaluation.
Import financing:
Musharakah can be used for import financing as well. There are two types of bank charges on the letter of credit provided to the importer:
(1) Service charges for operating as LC (Letter of credit).
(2) Interest charged on LC, which are not opened on full margin.
Musharakah/Mudarabah:
This is the best substitute for opening the LC. The bank and the importer ca make an agreement of Mudarabah or Musharakah before opening the LC.
If the LC is being opened at zero margin then xi agreement of Mudarabah can be made in which the bank will because Rab-ul-Maal and the importer Mudarib. The band will own the goods that are being imported and the profit will be distributed according to the agreement.
If the LC is being opened with a margin then a Musharakah agreement can be made. The bank will pay the remainig amount and the goods that are being imported will be owned by both of them according to their share of investment. The bank and the importer, with their mutual consent can also include a condition in the agreement, whereby; Musharakah or Mudarabah will end after a certain time period even if the goods are not sold. In such case the importer will purchase the bank's share at the market price.
Murabahah:
At present Islamic banks are using Murabahah, to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabahah agreement.
In fact the Murabahah financing requires the bank and the importer to sing at least two agreements separately; one for the purchase of the goods, and the other for appointing the importer as the agent of the bank (agency agreement). Once these two agreements are signed, the importer can negotiat and finalize all terms and conditions with the exporter on behalf of the bank.
Export financing:
A bank plays two very important roles in exports. It acts as a negotiating bank and charges a fee for this purpose, which is allowed in Shariah. Secondly it provides export financing facility to the exporters and charges interest on this service. These services are of two types.
(1) Pre shipment financing
(2) Post shipment financing
Now let us discuss these two items one by one. First i would like to discuss the Pre shipment financing.
(1) Pre shipment financing:
Pre shipment financing needs can be fulfilled by two methods, these are given here below.
(a) Musharakah/Mudarabah.
(b) Murabahah.
(a) Musharakah/ Mudarabah:
The most appropriate method for financing exports is Musharakah or Mudarabah. Bank and exporter can make an agreement of Mudarabah provided that the exporter is not investing; other wise Musharakah agreement can be made. Agreement in such case will be easy, as cost and expected profit is know.
The exporter will manufacture or purchase goods and the profit obtained by exporting it will be distributed between them according to the predefined ratio.
A problem that can be encountered by the bank is that if the exporter is not able to deliver the goods according to the terms and conditions of the importer, then the importer can refuse to accept the goods, and in this case exporter's bank including a condition in Mudarabah or Musharakah agreement that, if exporter violates the terms and conditions of import agreement then the bank will not be responsible for any loss in Shariah as the Rabb-ul-Mal is not responsible for any loss that arises due to the negligence of Mudarib.
Murabahah:
Murabahah is being used in many Islamic banks for export financing. Banks purchases goods that are to be exported at price that is less than the price agreed between the exporter and the importer. It then exports goods at the origional price and thus earns profit.
Murabahah financing requires bank and exporter to sing at least two agreements separately; one for the purchase of goods and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are singned, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank.
(2) Post shipment
Post shipment financing is similar to the discounting of the bill of exchange. its alternate Shariah complaint procedure is discussed below,
The exporter with the bill of exchange can appoint the bank as his agent to collect receivable on his behalf. The bank can charge a fee for this service and can provide interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of the loan.
Here two processes are separated, and thus two agreements will be made. One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a particular fee. The second agreement will provide interest free loan to the exporte, and authorize the bank for keeping the amount received through bill as a payment for loan.
These agreements are correct and allowed according to Shariah because collecting fee for services and giving interest free loan is permissible.
(1) Financing through Musharakah and Mudarabah does never mean the advancing of money. It means participation in the business and in the case of Musharakah, sharing in the assets of the business to the extent of the ratio of financing.
(2) An investor/financier must share the loss incurred by the business to the extent of his financing.
(3) The partners are at liberty to determine with mutual consent, the ratio of profit allocated to each one of them, which may differ from the ratio of investment. However, the partner who has expressly excluded himself fro the responsibility of work for the business can not claim more than the ratio of his investment.
(4) The loss suffered by each partner must be exactly in the proportion of his investment.
Project financing:
Keeping in mind these basic principles project financing is discussed below.
In the case of project financing, the traditional method of Musharakah or Mudarabah can be easily adopted. If the financier wants to finance the whole project the form of Murabahah can come in to operation. If investment comes from both sides, the form of Musharakah can be adopted. In this case, if the management is the sole responsibility of one party, while the investment comes from both, a combination of Musharakah and Mudarabah can be brought in to play according to the rules already discussed.
Working capital:
The capital of the running business may be evaluated with mutual consent. The value of the business can be treated as the investment of the person who seeks finance, while the amount given by the financier can be treated as his share of investment. The Musharakah may be affected for a particular period, like one year or sex months or less. Both the parties agree on a certain percentage of the profit to be given to the financier, which should not exceed the percentage of his investment, because he shall not work for the business. On the expiry of the term, all liquid and not-liquid assets of the business are again evaluated, and the profit may be distributed on the basis of this evaluation.
Import financing:
Musharakah can be used for import financing as well. There are two types of bank charges on the letter of credit provided to the importer:
(1) Service charges for operating as LC (Letter of credit).
(2) Interest charged on LC, which are not opened on full margin.
Musharakah/Mudarabah:
This is the best substitute for opening the LC. The bank and the importer ca make an agreement of Mudarabah or Musharakah before opening the LC.
If the LC is being opened at zero margin then xi agreement of Mudarabah can be made in which the bank will because Rab-ul-Maal and the importer Mudarib. The band will own the goods that are being imported and the profit will be distributed according to the agreement.
If the LC is being opened with a margin then a Musharakah agreement can be made. The bank will pay the remainig amount and the goods that are being imported will be owned by both of them according to their share of investment. The bank and the importer, with their mutual consent can also include a condition in the agreement, whereby; Musharakah or Mudarabah will end after a certain time period even if the goods are not sold. In such case the importer will purchase the bank's share at the market price.
Murabahah:
At present Islamic banks are using Murabahah, to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabahah agreement.
In fact the Murabahah financing requires the bank and the importer to sing at least two agreements separately; one for the purchase of the goods, and the other for appointing the importer as the agent of the bank (agency agreement). Once these two agreements are signed, the importer can negotiat and finalize all terms and conditions with the exporter on behalf of the bank.
Export financing:
A bank plays two very important roles in exports. It acts as a negotiating bank and charges a fee for this purpose, which is allowed in Shariah. Secondly it provides export financing facility to the exporters and charges interest on this service. These services are of two types.
(1) Pre shipment financing
(2) Post shipment financing
Now let us discuss these two items one by one. First i would like to discuss the Pre shipment financing.
(1) Pre shipment financing:
Pre shipment financing needs can be fulfilled by two methods, these are given here below.
(a) Musharakah/Mudarabah.
(b) Murabahah.
(a) Musharakah/ Mudarabah:
The most appropriate method for financing exports is Musharakah or Mudarabah. Bank and exporter can make an agreement of Mudarabah provided that the exporter is not investing; other wise Musharakah agreement can be made. Agreement in such case will be easy, as cost and expected profit is know.
The exporter will manufacture or purchase goods and the profit obtained by exporting it will be distributed between them according to the predefined ratio.
A problem that can be encountered by the bank is that if the exporter is not able to deliver the goods according to the terms and conditions of the importer, then the importer can refuse to accept the goods, and in this case exporter's bank including a condition in Mudarabah or Musharakah agreement that, if exporter violates the terms and conditions of import agreement then the bank will not be responsible for any loss in Shariah as the Rabb-ul-Mal is not responsible for any loss that arises due to the negligence of Mudarib.
Murabahah:
Murabahah is being used in many Islamic banks for export financing. Banks purchases goods that are to be exported at price that is less than the price agreed between the exporter and the importer. It then exports goods at the origional price and thus earns profit.
Murabahah financing requires bank and exporter to sing at least two agreements separately; one for the purchase of goods and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are singned, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank.
(2) Post shipment
Post shipment financing is similar to the discounting of the bill of exchange. its alternate Shariah complaint procedure is discussed below,
The exporter with the bill of exchange can appoint the bank as his agent to collect receivable on his behalf. The bank can charge a fee for this service and can provide interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of the loan.
Here two processes are separated, and thus two agreements will be made. One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a particular fee. The second agreement will provide interest free loan to the exporte, and authorize the bank for keeping the amount received through bill as a payment for loan.
These agreements are correct and allowed according to Shariah because collecting fee for services and giving interest free loan is permissible.