Musharika, in Arabic, literally means Sharing. In business context, it implies sharing of profit and loss in a joint venture, and in a predetermined ratio.

Investment & Management

1. Capital investment is provided by each partner.
2. Every partner has the right to participate in the management of the company.
3. Each partner acts as a trustee for the other partners. A partner has to obtain the express authorization from all the other partners to conduct work.
4. An arrangement can be made to make one or a few of the partners responsible for the management of the venture. In this case, profit proportion of the sleeping partners cannot exceed the proportion of their investment in the total capital.

Distribution of Profit and Loss

1. The ratio of distribution of profits must be agreed upon at the onset of investment.
2. A lump-sum cannot be fixed as the share of profit for any partner. Similarly, profits cannot be tied to a proportion of the capital.
3. The profit distribution has to be strictly conducted in proportion to the actual profits earned.
4. The share of profits may differ from the proportion of investment. However, if one of the partners is not active in the management as mutually agreed in the contract, then his share of profits should not exceed his share of investment.
5. Losses should be shared proportional to the ratio of investment made by each partner.

Termination of Musharika

1. The Musharika is deemed to be terminated in any one of these events:
• Any one partner decides to leave the Musharika - every partner has a right to terminate by giving prior notice to his partners.
• A partner dies - in this case, his legal heirs will have the option to continue with the Musharika or draw his share of the investment.
• A partner becomes insane or otherwise incapable of effecting commercial transactions.

2. To avoid the liquidation of the Musharika due to one person leaving the joint venture, a clause can be added at the onset of the contract stating that the Musharika cannot be liquidated unless unanimously agreed upon by all partners.
3. Upon termination, if the assets are in cash then these are distributed pro rata to the partners.
4. In most cases, all assets are not in liquid form. The partners may agree to liquidate these assets or distribute them amongst themselves.
5. In case the assets are such that they cannot be distributed, then they have to be liquidated and the proceeds distributed on a pro rata basis.
6. The Musharika can be continued, if only one partner wishes to terminate, with the mutual consent of the other partners. In this case, the other partners have the option to buy the share of the leaving partner.
7. If the share of the leaving partner cannot be determined or evaluated, then he can force the Musharika into liquidation.

Musharika Agreement draft