Ethica Institute of Islamic Finance™

What are the restrictions for investing capital in a Musharakah?

The share capital of a Musharakah may be in the form of cash or as a commodity. If the capital is a commodity, its market availability and value must be determined in order to establish the ratio of investment. The restrictions for establishing investment capital in a Musharakah are: • Debt may not be established as capital in a Musharakah • One partner may not guarantee the return on capital for another partner • The ratio of profit received by the working partner may exceed his investment capital. The maximum ratio of profit for the silent partner may be equivalent to but not exceed his investment capital Additionally, there are criteria to be followed for the sharing of profit and loss: • The profit share cannot be stated as a lump sum or a percentage of the investment capital • The proportion of profit is allocated between partners based on mutual consent. However, the silent partner may not receive a proportion of profit greater than his capital investment • Loss in a Musharakah is shared based on the ratio of capital investment of each partner

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