Question

Select an Islamic bank or Islamic banking window and analyse its Musharakah financing facility. Identify the features that make it Shari’ah compliant. Also critically analyse the whole procedure and identify the non-Shari’ah compliance risks that Islamic bank might face using your theoretical and practical understanding of Islamic finance

Answer 1

It is a Joint Arrangement / Partnership Agreement having the following characteristics:

• More than one parties provides capital as well as skills.
• Profit is shared by all the parties in agreed profit sharing ratio.
• Loss is to be borne by providers of capital only in proportion to the capital contribution.

Features that make it Shari’ah compliants are:

• Prohibition of interest (RIBA)
• Prohibition of speculation (GHARAR)
• Prohibition on forbidden goods.
• Profit and risk sharing.

Failure to comply with all applicable laws , rules, regulations and regulatory guidelines will constitute a breach. It may result not only in the imposition of disiplinary , civil or criminal sanctions against the islamic financial institutions but also damaging one of ismalic financial institutions most important asset it's reputation. In addition it may also result in the banking license being suspended / withheld by the regulator.

Along with that it may also have to face credit risk, equity investment risk, market risk , liquidity risk, rate of return risk and operational risk.