Musharaka literally means sharing. In the context of business it means a joint venture in which all partners share the profit and loss of the joint venture. Musharaka is an ideal alternative to interest based financing with positive and far reaching effects on production and distribution.

The general presumption regarding Musharaka is that it is a contract for initiating a joint venture right from its inception and to continue right up to the end of the business venture, but in fact, it is a versatile instrument which can be and is being applied in a wide variety of forms all over the world. Musharaka is used today to finance "going concerns" where partners may join and leave without adversely affecting the continuity of the business. The concept of Musharaka is based on some principles and so far as these principles are not violated, the form and procedure of Musharaka can take any shape.

All rules for a valid mutual contract should be observed. e.g. The parties should be capable of entering into a contract, the contract should take place with the free consent of the parties without any duress etc....

The proportion of profit to be distributed between the partners must be agreed upon at the time of entering the contract.

The ratio of profit must be determined in proportion to the actual profit earned and not in relation to the capital invested by a partner.

It is not allowed to pay a fixed lump sum profit amount to any of the partners or any rate of profit linked to the amount of the investment made by a partner.

The ratio of profit may differ from the ratio of capital contribution provided the partner who has put an express condition that he will not work does not receive more than his ratio of capital contribution. This is the view of Imam Abu Hanifa (R.A.) and is in accordance with the AAOIFI Sharia Standards.

Losses shall be shared in the exact proportion of the capital contribution of each partner.

The normal principle of Musharaka is that every partner has a right to take part in the management and to work for it. However, the management of the project may be carried out by all the partners or by just one partner.

Finance using the structure of the Musharaka is available to exporters who require pre-shipment finance (packing credit) and post-shipment finance (export bill negotiation) under export Letters of Credit. Musharaka financing is also available for imports, local trading, working capital financing, real estate, etc., on a selective basis.

Security can be taken in a Musharaka transaction but shall be only enforced in circumstances involving fraud, negligence or mismanagement by the managing partner.