Financing Through Musharaka: Principles and Application

Abstract

The purpose of this article is to highlight the workings of Islamic finance in general, and Musharaka as a financial instrument in particular. Historically Musharaka was practiced by Arabs long before the advent of Islam, and is therefore considered by many scholars to be the most authentic form of Islamic contract. Musharaka is based on the profit-and-loss sharing system where two or more persons combine either their capital or labor together, and they share in the profits and losses of their venture. While the demand for Musharaka compared to other Islamic financial instruments is relatively low, it is expected that in the future to defend the system against criticism; more contracts will be established using Musharaka as the financing option.

Keywords: Musharaka, Islamic banking and finance, diminishing partnership, home loan

JEL Classification: F23, G21