Partnerships for Success: A Case of Musharaka for Small and Micro Enterprise Development
This paper focuses on a specific business partnership contract model called Musharaka, which is Sharia- compliant and can be used to promote social enterprises and inclusive business models amongst Muslims. It states that in the North African and Middle Eastern region alone, there are approximately 4.5 million entrepreneurial poor who lack access to financial services.
The paper analyzes the essentials of Musharaka contracts such as basic rules governing such contracts, nature of capital, distribution of profits and losses and others. It also discusses key variants of Musharaka contracts and their applications to microfinance, namely:
- Permanent Musharaka: In this case, an Islamic Financial Institution participates in the equity of a project and receives a share of profits on a pro rata basis;
- Temporary Musharaka: An Islamic Financial Institution enters as a partner for a specified period and receives its share of dividends and its principal equity contribution at the end of the contract;
- Diminishing Musharaka: A method through which the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset to the participants.
The paper concludes that microfinance and Islamic finance can potentially reinforce each other as they share identical goals.