Diminishing Musharakah

1.1 OVERVIEW OF DIMINISHING MUSHARAKAH 1.1.1 Concept of Musharakah, its types, basic rules and areas of application Since the term “Diminishing Musharakah” as a mode of Islamic finance originated from another mode of finance “Musharakah”,thus it is more important to have a brief idea of Musharakah for the better understanding of Diminishing Musharakah. Musharakah derived from Arabic word “Shirkah” which means being a partner. So, the lateral meaning of Musharakah is sharing and under Islamic jurisprudence, Musharakah means a joint enterprise or venture formed under a contract by mutual consent of the parties for conducting some business in which all parties share the profit according to pre-agreed ratio while loss is shared in accordance to the ratio of their capital contribution. In Musharakah, the share of each partner should be clearly known and all partners must contribute their capital in terms of money or species at an agreed valuation. The assets of Musharakah are jointly owned in proportion to the capital of each partner. In Musharakah every partner can involve in the management of the business but it is not necessary doing so, the partners may employ an outsider for managing the business, inmost cases, the there is a mixture of management, i.e. some of the partners together without siders having an expertise of managing such business. The partner who involves in the management is supposed to get the management fee plus the profit in the proportion to his share, and in case of loss, he is still entitled to get the management fee as an employee. When the partners choose not to involve in the management i.e. silent or non-working partners, the ratio of their profit should not exceed the ratio of their capital