English
As with all things business and finance, Musharakahs contains advantages and disadvantages, with the determining factor being the needs and goals of the investor. Analyzing the strengths and limitations of a Musharakah (and for what type of activity) may be crucial to decide whether or not to enter into one.
Read more about: Your Basic Guide of Musharakah Contracts
The most obvious of the advantages is the fact that a Musharakah is a fully Shariah compliant instrument for both owning and managing a business as well as obtaining financing.
For the Shariah-minded or ethically-minded investor this definitely makes it a factor worth exploring. Another advantage of any instrument being Shariah-compliant is that it reduces the debt burden on a business, as interest bearing loans can drag a business down financially.
A Musharakah is built on the concept of profit and loss sharing. Profits are shared based on an agreed upon ratio (regardless of actual financial contribution) and losses are spread out according to financial contributions.
And as risk management is a crucial element when deciding on an investment, the equitable distribution of losses allows for the mitigation of risk.
Furthermore, the idea of sharing the risks and rewards gives the partners a sense of communal purpose. It also encourages a sense of accountability, as any failure on one to contribute adequately to the venture will hurt the entire group.
A partner need not contribute financial capital to be part of a Musharakah. It could also mean contributing assets to the venture, including real estate, property, a production facility, etc. or labor and expertise.
This flexibility not only allows people with various resources to take part in a Musharakah, but it also provides those with limited resources but valuable skills and expertise to contribute to the business and earn wealth off the back of it.
The nature of Musharakah allows it to be used in a variety of business applications. Musharakahs can be used to form joint ventures, structure companies of all sizes, and develop one-off projects such as real estate construction.
It can also be applied as a financing instrument, as one of the most common contemporary use cases for it is to finance the purchase of homes and equipment by partnering with a bank in the form of a diminishing Musharakah.
Musharakahs comes with unlimited liabilities, meaning that each partner could be held personally liable for the debts and obligations incurred by the business according to their share in the business. Consequently, partners may lose personal assets.
While this may encourage a degree of personal accountability by the partners, business fail or are unable to manage their debts and obligations for a variety of reasons outside of the control of the partners.
Furthermore, as a collective effort, it may be unfair for a partner to be hurt personally for the obligations of business. It may discourage or make it unfeasible for them to take part in another venture in the future.
In a Musharakah, all partners have the right to take part in the direct management of the venture. While they can delegate management to a few, they all have the right to engage in the day-to-day decision-making.
This ad-hoc management structure could result in a lack of focus, incoherent and slower decision-making. If one of the managing partners doesn’t have the level competency required it could negatively impact the performance of the business. It could also open the door to disputes and conflict.
A typical Musharakah does not include a built-in mechanism for issuing shares. This is because the partnership is built on proportionate ownership and not by the amount of shares owned in a business.
This makes it difficult for a business to raise capital through equity, which coupled with the inability to seek interest-bearing financing, could stifle the growth of the venture.
Partners can exit the venture at any time, thereby terminating the partnership. Each partner has the right to withdraw under certain conditions, including that their exit does not cause any losses or damage to the business and after providing proper notice.
The business is then liquidated, This could lead to two issues:
First: is that the Musharakah cannot survive the exit of a partner, leaving it in a constant state of impermanence.
Second: there is no established mechanism to allow a partner to exit by selling their shares without terminating the venture.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
