- Musharaka is a combination of funds and the expertise, whereas, Musharaka requires all partners to invest their equity. Profit sharing ratio between partners must be pre-determined.
- Profit ratio may not necessarily be linked to the equity contribution percentage but must be agreed to by all partners prior to entering into the Musharaka agreement.
- There is no bar on non-Muslims entering into Musharaka transactions with Muslims or between themselves.
- As per sharia, a Musharaka has its own juristic personality, independent of his partners, same as mudaraba.
- Musharaka partners are agents and guarantors for one another and stand-by each other in achieving the Musharaka objectives.
- There can be no pre-agreed return on contribution of equity by the partners since it makes the Musharaka void in the eyes of sharia.
- Loss caused to Musharaka due to a partner’s negligence or misconduct will be borne by that partner.
- Genuine loose in a continuing Musharaka is borne by the Musharaka, and as a result pro-rata by all partners.
- Any residual loss beyond equity exhaustion must be absorbed by all partners as per their equity contribution ratio in the Musharaka. This is because musharaka is an unlimited liability entity quite contrary to Mudaraba where only the investor (rabb al mal ) invests.
- There can be a musharaka on diminishing basis whereby an Islamic bank invests the funds with an up and running business for expansion of production line and then allows the customer to purchase its equity on a periodical basis till such time that it has purchased all equity invested by the bank.
- In this case, the Islamic bank earns profit on its outstanding amount of the equity remaining invested in customer’s business till it is completely redeemed.
- The Islamic bank may grant an incentive or performance bonus to the client for achieving certain projected return on its equity. In such case, the profit over and above such threshold is given to the client as incentive or performance bonus.