Introduction to musharaka—a profit and loss sharing instrument of Islamic finance

A fundamental principle of Islamic finance is that of ‘no profit without risk’, ie the idea that no person should make a gain or profit unless they are contributing an element of risk. This principle is best illustrated when applying Islamic instruments of profit and loss sharing. For more information on this principle, see Practice Note: Key principles of Islamic finance.

This Practice Note will discuss Musharaka, an Islamic finance technique which was originally based on profit and loss sharing and which is analogous to a conventional partnership arrangement. In simple terms, a Musharaka is a partnership that is customarily entered into between two or more parties, although not necessarily for a limited time period and most commonly for the purpose of entering into a business venture. Typically, each party to the Musharaka makes a capital contribution to the venture and the profits and losses are shared between them. Another Islamic finance arrangement similarly based on the principle of profit and