Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 333of the goods, the bank can provide financing on the basis of Shirkah. Profit would be sharedon a pre-agreed percentage. The bank can secure itself from any negligence on the partof the exporter. However, being a partner of the business, the bank will be liable to bearany loss which may be caused due to any reason other than the negligence of the exporter.However, in order to undertake such an operation, banks need to understand the nature ofthe exporter’s business and other requirements.Banks can also provide Musharakah-based financing through Musharakah agreementswith their clients. It is observed that a Sharī´ah expert would not have any objection ifthe banks make a provision in the Musharakah agreements giving them the right, on anagreed formula, to convert their investment outstanding at any time during the currency ofthe agreement into ordinary shares of the company. The details can be worked out by theexperts. The client may be required to seek clearance from the bank before declaration ofany dividend. There should also be a provision for adjudication to resolve any differencesbetween the parties. There may be a review or a resolution committee with members namedin the Musharakah agreement to deal with the issues of breach of contract by either of theparties. It seems imperative that banks shall employ some mechanics for monitoring theaffairs of the concerned companies. They will have to gear up their machinery for a morethorough appraisal of the project feasibility and other aspects in the preliminary stages aswell as for subsequent monitoring of projects’ implementation.In the case of project financing, the traditional method of Shirkah can be easily adopted.If the financier wants to finance the whole project, the form of Mudarabah can be used. Ifinvestment comes from both sides, the form of Musharakah would be more suitable. In thiscase, if the management is the sole responsibility of one party, a combination of Musharakahand Mudarabah can also be used according to the rules.The following may be the flow of transactions in the case of Musharakah for runningbusiness:1. A running Musharakah Account for the client will be opened in the books of the financingbank.2. The client’s proceeds from the sale of finished of goods will be credited in the RunningMusharakah Account.3. The client’s cash flows generated from investment activities (for example, sales proceedsfrom the disposal of fixed assets) and cash flows from long-term financing activities (forexample, long-term finance availed for the project) cannot be credited in the RunningMusharakah Account.4. For determination of the period of running Musharakah limit, all the clients of the bankwill be divided into the following three categories: seasonal, cyclical and continuedoperation.5. At the end of each quarter or month, as the case may be, the profit earned by the clientin the Musharakah will be paid to the bank.6. The profit-sharing will be based on the computed operating profit for the same periodfor which the running Musharakah limit was awarded. 91Shirkah can also be used for financing through the purchase of Musharakah/Mudarabahcertificates like Shirkah-based Sukuk, term finance certificates (TFCs) or participation term91 For details, see Usmani, 2000a, pp. 55–81.