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Musharaka (مشاركة) is the Islamic contract for establishing a joint venture partnership. In musharaka, two or more parties contribute capital to a business and participate with the related profits and losses.

Simple Musharaka

Musharaka is about contributing capital to a company, project, or any kind of asset transaction. The profit and the losses needs to be shared. This method is recommended by Muslim economists as being the most fair and just method.

In a Musharaka contract all parties may take part in the management or some parties may not take part in the management (silent partnership). Losses need to be born proportionately to the capital provided by each party (pro rata). Regarding the profits there is a disagreement between the schools whether other than pro rata distribution is permissible.

Diminishing Musharaka

A modern variation of this partnership concept is the joint ownership of company, project, or asset which is virtually divided into units to be transferred for a fixed price during a fixed period of time from the financier to the ultimate owner.

For the units not yet owned by the ultimate buyer a rent is due according to the character of the underlying transaction; a rent for a house jointly owned is due for the part not owned yet by the occupier, or in case of a company the profit share.

From the legal perspective an undertaking like a diminishing musharaka consists of multiple contracts and binding promises: The joint ownership, in case of rental goods the rent to the financier if so occupied by the buyer and the sales contracts to acquire subsequently the remaining units from the financier following the binding promise of the ultimate buyer to do so.