The profit-loss sharing mode of finance


Md. Khairul Hasan, CSAA :

Islamic Finance has witnesses an overwhelming growth across the globe thanks to its inherent strength, asset-based investment, Shariah compliance transaction, profit-loss sharing mode ofbusiness, and welfare-oriented activities for the society.

Now, Islamic banking industry has expanded its wings in 80 countries, irrespective of Muslim and Non-Muslim countries, through more than 1400 Islamic Financial Institutions with accumulating assets of around $2.50 trillion.

With the global expansion of Islamic Banking industry, Bangladesh has also experienced a significant development in Islamic finance with meeting up the urges and aspirations of the country’s people for the system, which especially drawn the attention of the mass people in Bangladesh.

Islamic banking in Bangladesh, started its journey with inception of Islami Bank Bangladesh PLC in 1983, has recorded noteworthyperformances and occupied about one-third market share of the country’s entire banking industry.

At present, Islamic Banking’s deposits reached to Tk. 4,319.89 billion, investment Tk.4,290.71 billion, and remittances Tk. 280.47 billionwith holding a market exposure of 27 per cent, 28 per cent, and 39 per cent respectively.

Total 10 full-fledged Islamic banks, 1,701 Islamic banking branches including 30 Islamic Banking Branch, and 615 windows of 15 conventional banks have been providing Islamic Banking services to the customers. Total 50,146 officials are working in Islamic Banking industry.

The global demand for ethical and sharia-compliant financial products has been on the rise, with Islamic banking experiencing exponential growth in recent years.

As more individuals and businesses seek alternative financial solutions that align with their values, Musharakahmode of financing presents a viable option.

By sharing both profits and losses, this Islamic financing concept emphasizes fairness and mutual cooperation, which resonates with many customers.

The increasing popularity of Islamic finance, combined with the unique characteristics of Musharakah, indicates a bright future for this financing model.

The Arabic terminology Musharakah, which translates to “partnership” in Arabic, embodies ethical and equitable values.

It is one of the core financing mode of Islamic Banking arrangement where two or more parties come together to contribute capital and share profits and losses in a joint venture.

Any losses, if any, incurred are distributed among the partners in proportion to their investment.

This mechanism ensures that both the bank and the customer bear the risk and reward of the business venture, promoting a fair and balanced approach to financial transactions.


Unlike conventional banking, where interest is charged on loans, Musharakah provides a more equitable and ethical approach to finance. It encourages partnership and shared responsibility, fostering a sense of cooperation and mutual benefit.

Musharakah financing encourages entrepreneurship and innovation by providing a platform for individuals to pursue business ideas without the burden of excessive debt. In conventional banking, entrepreneurs often have to rely on loans, which can be accompanied by high interest rates and strict repayment terms.

In contrast, musharakah allows entrepreneurs to access funds without incurring interest, while also sharing the risks and rewards with their partners.

By promoting financial inclusivity, encouraging entrepreneurship, ensuring equitable distribution of wealth, and fostering long-term relationships, Musharakah financingcontributes to a just and sustainable financial system. Its emphasis on cooperation, fairness, and shared responsibility sets it apart from conventional banking practices and aligns with the values and teachings of Islam.

While Musharakah holds immense potential, it is not without its challenges. One of the main obstacles is the lack of standardized legal frameworks and regulations governing this financing model. Inconsistencies in interpretation and application can hinder the growth and expansion of Musharakah globally.

The absence of a comprehensive regulatory and legal framework for Musharakah poseschallenges. In many jurisdictions, the existing laws and regulations are not tailored to accommodate the unique features of Musharakah contracts.

This creates uncertainty and ambiguity, making it difficult for financial institutions and individuals to engage in Musharakah transactions confidently.
Managing risks associated with musharakah is also a significant concern.

In a Musharakah partnership, all parties share the profits and losses based on their respective capital contributions. However, in practice, it can be challenging to determine the exact share of each partner in the profit or loss distribution.

This ambiguity can lead to disputes and conflicts among the partners, potentially jeopardizing the success of the partnership.

To address these issues, different national and international bodies, regulatory authorities need to collaborate and establish a standardized framework that ensures transparency, accountability, and legal protection for all parties involved.

It is crucial to focus on education and awareness. Financial institutions should invest in educating their staff and customers about the principles and benefits of Musharakah. Additionally, governments and regulatory bodies should collaborate to develop a clear legal and regulatory framework that supports the implementation of Musharakah contracts.

The future of Musharakah financing in the global financial landscape appears very promising. With its emphasis on fairness, inclusivity, and shared risk, this Islamic finance model has the potential to transform the way banking is conducted worldwide.

By addressing challenges, standardizing regulations, and fostering collaboration, Musharakah can pave the way for a more equitable and sustainable financial system. As customers and institutions recognize the value of profit and loss sharing, the growth and expansion of Musharakah financing are likely to continue in the years to come.

(The writer is an Islamic Banker, and Certified Shari’a Adviser and Auditor (CSAA) fellow of Bahrain based Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI).