Bankers cannot assume in this global economy that everybody operates by the rules set down by J.P. Morgan Chase or the Bank of England. In various parts of the world there are means of transactions that are quite different. These reflect local customs and culture. Islamic world has banking practices that are quite different from those of the West. One of these is Musharakah. Moreover, it’s worth visiting our site where you may get additional information about Ijarah in Islamic banking.
What is Musharakah in Islamic Banking?
Before going any further, a person needs to understand that much business in the Middle East is influenced by the Islamic holy law, or Sharia. Interest is forbidden because this is usury. As a consequence, there are a number of ways in which financial business is conducted to exclude interest from the discussion. Musharakah is one of these. It is a partnership structure with profit and loss sharing attributes that take the place of loans with interest. Each party in the Musharakah arrangement is going to share in both the profits and the risks. The bank does not charge interest but will instead take a portion of the actual profits earned. What is interesting about this is that while the bank will share the profits, it is going to share in the losses as well. The loss, if any, will be in proportion to the initial investment.
Diminishing Musharakah in Islamic Banking
No one should be deceived by this. Diminishing Musharakah does not mean that Islamic banking is losing interest in Musharakah. That is not the case at all. Diminishing Musharakah is an option within the rules and regulations of Musharakah.
What happens in this arrangement is comparable to a leasing sale – back arrangement. The two parties, the business person, and the financier, go into a partnership to purchase an asset. The financier’s portion of the partnership is divided into smaller units. These portions are purchased by the business person over a period of time until ultimately the business owns the asset. This is something that is used particularly in fixed assets such as property. It is a way of avoiding the use of interest and staying compliant with the rules of Sharia.
Musharakah in Islamic Banking
No one should think that the use of Musharakah is diminishing itself in any way. Indeed, this participatory form of finance is considered quite favorably in the Islamic world. There really are benefits for both sides in the situation. A borrower is able to get necessary financing without having to worry about interest payments. The bank has a vested interest in the assets purchased, and will probably pay greater attention to how it is being used. The opportunity of the borrower buying back the entire asset will sure the bank receives payment on a routine basis.
Musharakah and other forms of Islamic banking underscore the importance of relationships in the Islamic world. No one can take a passive interest in Musharakah because there is the chance of having to share the losses. What it tells a Western banker is that doing business in the Islamic world is going to require carefully cultivating trust and understanding. This is not a case where a 30 minute meeting with a loan officer is going to result in anything. Relationships matter and Islamic financing underscores that. In addition, you may find more information about Murabaha in Islamic banking by visiting our site.