Musharakah

Musharakah (Arabic: مشاركة, literally 'sharing' or 'partnership') is an Islamic equity partnership in which two or more parties contribute capital to a joint venture and share profits according to a pre-agreed ratio, while losses are shared strictly in proportion to each party's capital contribution. It is the purest form of profit-and-loss sharing (PLS) in Islamic finance and the closest Islamic equivalent to a joint venture or partnership. Diminishing Musharakah (Musharakah Mutanaqisah) is widely used for home finance: the bank and customer co-own a property, the customer gradually buys out the bank's share while paying rent on the bank's remaining portion. Musharakah is governed by AAOIFI Shariah Standard No. 12. It represents the ideal Islamic financial structure because it aligns risk and return for all parties and eliminates the predetermined interest return prohibited by Shariah.