What is Musharaka?
Musharaka is a Sharia-compliant partnership-based financing structure in which two or more parties contribute capital and expertise to a venture, sharing profits according to a pre-agreed ratio and losses strictly in proportion to capital contribution. Profit sharing must be by agreement, but loss sharing is fixed by capital share. Musharaka is widely used in trade finance, project finance, and home finance (diminishing Musharaka).
How It Works
- Partners agree on capital contributions, profit-sharing ratio, management responsibilities.
- All partners are entitled to participate in management unless otherwise agreed.
- Profits are distributed by the agreed ratio.
- Losses are shared strictly in proportion to capital contributions.
- Diminishing Musharaka allows one partner to gradually buy out the other (e.g., a homebuyer buying the bank’s share over time).
Saudi Context
Saudi Islamic banks (Al Rajhi, Alinma, Bank AlBilad) widely use diminishing Musharaka for home finance under the Sakani program: the bank and homebuyer jointly purchase the property, and the buyer gradually acquires the bank’s share over the financing tenor. Project finance Musharaka structures also appear in PIF-related infrastructure deals. SAMA and the banks’ Sharia boards oversee compliance.
Example
A bank and a customer jointly purchase a SAR 1.2 million home under diminishing Musharaka. The bank funds 70% (SAR 840,000), the customer 30% (SAR 360,000). The customer pays monthly: a rental for using the bank’s share plus a buyout payment that gradually transfers the bank’s share to the customer. After 20 years, the customer owns 100%.