The second type of capital financing instrument used by Islamic banks is based on a Musharaka contract. It creates a partnership or joint venture for an economic activity between the bank and one or more customers. In this joint venture, all parties can contribute to a (not necessarily equal) percentage of the three economic factors of production (capital, labour and entrepreneurship). On its website, the bank describes the contract as a limited partnership that supports customers who do not have the resources to import what they need. A customer provides some of the money, the bank delivers the rest and the bank issues the letters of credit. Then, after the arrival of imported items, one of three scenarios applies: Islamic banks use successive musharaka when investing in a project, joint venture or business. Both parties share the benefits or losses of this partnership on the basis of their initial agreement from Musharaka. The profit-and-loss participation ratio (PLS) can be changed each time the client repurchases equity units or under another agreement between the bank and the customer. The bank`s proceeds in two ways to reap the benefits of this transaction.
First of all, the bank`s investment comes back entirely (provided the project or the company is a success). Second, the bank receives the percentage of profit included in the partnership agreement. If Musharaka`s declining configuration seems confusing, think about it: a customer and a bank are ready to enter into a partnership for a project or business. The project or partnership activity is based on a number of participation units and partners agree on certain periods of time to remain invested; this agreement appears in the treaty. Partnership is seen as the essence of the Islamic banking system. This is why Islamic banks should depend on partnership contracts for the acceptance of deposits and the investment of funds. In practice, Islamic banks enter into partnership contracts for the acceptance of deposits. However, they are rarely used for investment. Islamic banks rely heavily on partnership contracts to invest funds around the world.
This paper provides a critical overview of the existing literature on the rare use of partnership contracts by Islamic banks for investment purposes. This report highlights the contributions made by the existing literature to current knowledge on the constraints of the application of partnership contracts in Islamic banks. This review identifies the concentrations of research efforts and provides directions for future research. i. Profit and loss sharing (Mudarabah): a contract between two parties; one provides capital, the other works to form a partnership, to share the benefits by certain agreed proportions. Keywords: constraints, partnership, contracts, association of the Islamic bank (Musharaka): each partner can keep its share of the partnership until the end of the joint venture, project or company. However, partners are often allowed to withdraw or transfer their shares (unless the original contract expressly states that all partners remain in the partnership until the due date). If one of the partners withdraws from the contract, the entire partnership does not end. A partner may gradually purchase the other partner`s share of equity until the entire equity of the other partner is transferred. It is a declining balance of equity, with a partner`s equity balance gradually decreasing. The agreement stipulates that both parties share the profit in this way: Jamaldeen, Inc., receives 80 percent, and the bank receives 20 percent.
(Why inequality? Jamaldeen, Inc. brings more work and know-how to the project, as well as a decent percentage of capital.) Similarly, both parties bear losses after their capital inflows (40 per cent for the company and 60 per cent for the bank).