By: Dr Saad Al-Harran
In the contemporary world there is always a dilemma for the entrepreneur who has a promising idea for a new venture. How is he to raise the capital necessary to launch the venture? Borrowing the money is probably out of question. If the normal interest rate is 6% but the venture has a 10% chance of failing within a year, the lender will probably charge interest at a rate of 16%. High interest, plus amortization, will impose heavy fixed costs on the venture from the outset and this will increase the danger of failure, and in turn the interest rate. Moreover, if the venture's prospects can not be predicted with reasonable confidence, it will be very difficult even to calculate an appropriate interest rate. The alternative must be for the entrepreneur to admit a partner to the business who is entitled to receive a portion of profits from the venture, if any, in exchange for contributing the necessary capital to it. The partner's compensation is determined automatically by the fortunes of the business. There is no need to compute an interest rate and there are no fixed costs of debt, the partner will receive his profits only if and as earned.
However, Islam aims at establishing a social order where all individuals are united by bonds of brotherhood and affection like members of one single family. This brotherhood is universal and not parochial. It is not bound by any geographical boundaries and encompasses the whole of mankind and not anyone family group, tribe or race.
The purpose of this chapter is to thoroughly examine the framework for musharakah (equity participation) and other financial instruments of the Islamic banks. The chapter is divided into eight sections. The first will define musharakah and give its historical background while in the second the different types of musharakah will be identified. The third will deal with the conditions of present day musharakah and the fourth analyses equity financing and its channels of investment in an Islamic society. The fifth will identify the steps to be taken to transfer to an equity financing system and the sixth is concerned with the role of equity financing in mobilizing funds and stabilization of the system. The seventh section describes other financial instruments of Islamic banks. Additional subsections are included which examine ijara (leasing), murabaha (cost plus financing), qard al-hasanah (beneficence loans), bai muajjal (deferred payment sale), bai salam (purchase with deferred delivery) and tadamun (solidarity). Finally some conclusions are drawn.
The concept of brotherhood and equal treatment of all individuals in society and before the law is not meaningful unless accompanied by economic justice such that everyone gets his due for his contribution to society or to the social product and that there is no exploitation of one individual by another. The Prophet aptly warned: "Beware of injustice for injustice will be equivalent to darkness on the Day of judgement". This warning against injustice and exploitation is designed to protect the rights of all individuals in a society (whether consumers or producers and distributors, and whether employers or employees) and to promote general welfare, the ultimate goal of Islam.
Of special significance here is the relationship between the employer and the employee which Islam places in a proper setting and specifies norms for the mutual treatment of both so as to establish justice between them. An employee is entitled to a "just" wage for his contribution to output and it is unlawful for the employer to exploit his employee.
1. Definition of Musharakah & Its Historical Background
Musharakah or shirkah can be defined as a form of partnership where two or more persons combine either their capital or labour together, to share the profits, enjoying similar rights and liabilities.
From the very inception of human society, the methods to meet...