Financing by participation (Musharakah) (Its forms, risks, and the means to control it)

Abstract

Islamic banks are distinguished by the diversity of their forms and methods that meet the different needs of society to achieve economic and social prosperity, which is the goal of every society.

Funding by participation: It is a banking method used by Islamic banks to provide financing to a specific project, upon customer’s request, without taking any interests; instead, the bank participates in the potential outcome, whether it is a profit or a loss, under agreed rules and distributional foundations between the two partners (Al-Mutaaqidin).

In addition, its most popular forms in Islamic banks are: fixed (long-term) participation “permanent musharakah”, diminishing musharakah which ends with ownership – the most widespread form-, and the variable musharakah.

It turned out that financing by participation is legitimate and permissible in Islamic sharia, with regulations of general corporate provisions and special regulations, and there are as many regulations as the number of forms of participation itself. Moreover, it is considered a new and an innovative corporation, in which some images in fiqh of corporate and Islamic transactions can be applied to it.

One of its most important features is that it is interest-free, and it is one of the best alternative forms. Moreover, its strength lies in improving professional competence and increasing economic growth, and the bank becomes an active participant.

Studies have revealed that the most important risks associated with funding by participation are the high credit risks related to its form due to the lack of warranty requirement, and most of the risks have been found to have legitimate controlled protection means, which raises the level of reassurance for banks that use this form of funding.