Musharaka refers to profit and loss sharing between the lender and the borrower completely doing always with the interest. It is an arrangement of financing in which parties offer funds, efforts, or/and skills. Profits are share among them according to the rate investor. In Pakistan, the musharaka Financing mode has be launched by commercial banks to meet their working capital requirement of the trade and industry . The Bank carry out musharaka functions out of profit and loss accounts (PLS) deposits. Borrower receive interest –free loans on the basis of equity participation and profit or loss from the bank or any other financial institution . The lending bank enjoys the right of participation in the borrowers business to the limit of amount of loan. In other words, the borrower is liable to the bank (the lender) up to the limit of the invested (i.e. Borrowed )amount . In case of profit (or loss) the lender will receive his prorate share or profit( or suffer a loss). The agreement between the investor and the company is referred to as muharaka investment agreement which stipulates that the operation of the musharaka will be carried out by the borrowing company. The bank as a trustee will watch, evaluate, and supervise the performance.
Musharaka is a system in which two parties join their capitals and do a business which is based on profit loss system. It is interest free . Both parties will share profit or loss according to their share in investement.
A relationship established under a contract with mutual consent of all involved parties that sharing of profits and losses will take place in a specified joint business venture. It is an agreement [under] which the Islamic bank provides funds, along with funds from the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by every partner strictly in proportion to respective capital contributions