Musharaka
In one sentenceA partnership between two or more parties contributing capital to a project, in which profit is shared at the agreed ratio and loss is shared according to each party's share of the capital.
Simply put
Each partner contributes part of the capital, and they may agree on profit ratios that differ from the capital ratios (for example, the one who manages the project takes a larger share). Loss, however, is borne by each partner in proportion to his share of the capital.
Banks use Musharaka to finance a specific project or deal, and each party measures its share and its portion of profit or loss at the end of each period.
Worked example
Two partners set up a store: the first with 600,000 SAR and the second with 400,000 SAR, and they agreed to split profit equally because the second manages the store. In one year the store made a loss of 100,000 SAR.
Capital ratio: 600,000 and 400,000 of 1,000,00060% and 40%
First partner's loss: 100,000 × 60%60,000 SAR
Second partner's loss: 100,000 × 40%40,000 SAR
Loss is shared by capital shares, not by the profit ratio60,000 and 40,000 SAR
Don't confuse it with
MudarabaIn Mudaraba the capital comes from one party and the work from the other; in Musharaka all parties contribute capital.