72 Islamic Finance in Practice
For instance, assume the finance limit is $100−on day one, the client
makes a payment of $80 to a supplier for some raw materials drawn on the
musharakaaccount, and later the same day, pays a sum of $10 (received as
payment for goods delivered to a buyer) into the account. At closing on that
day, the account balance will be $30 ($100 - $80 + $10), which implies that
the bank has contributed $70 to the client’s business on that day. How?
Well, the bank made $100 available to the customer, he used $80 of that,
and “paid back” $10, so he ended up using $70 of the bank’s money in his
musharakaon that day.
From the outset, the bank and the customer will agree on a profit
distribution ratio for theirmusharaka. The business will earn a certain
profit every period (where the period will be defined beforehand), which will
be distributed between the bank and the customer based on this profit ratio.^1
Depending on the daily balance of themusharakaaccount (which tells us
how much of the bank’s capital is utilized per day by the business from the
musharakaaccount), and the profit earned over the period, it is possible to
obtain an “average profit per dollar per day”figure. Thisenablesacalculation
of the profit entitlements of the partners. This method of using an “average
profit per dollar per day” formula to calculate profit entitlements represents
anijtihad(or Shari’a legal ruling based on interpretation), and herein lies
the novelty of this product.
The most convenient method of calculating and sharing profit would
probably be on the basis of gross profit. The business would quite likely
agree to absorb all the costs and share gross profits because of the associated
operational simplicity and independence, and also in exchange for a higher
than proportionate profit share to compensate it for bearing all the costs.Conclusion
The number of Shari’a-compliant avenues available to solve WCF needs is
increasing. At present, many options are potentially available, in particular
for WCF-1 requirements, with the number of WCF-2 solutions available also
on the rise. As we have seen, in addition tomurabaha, it is possible to use
ijara,istisna’a, and diminishingmusharakato provide WCF-1. Based on
recent innovations and efforts in product development, a newmusharaka-
based product has emerged, which acts as a substitute for the conventional
running finance facility, and may offer a solution to composite WCF needs
(both WCF-1 and WCF-2); hence, it is referred to as WCF-3. In addition, so
fartawarruqandsalam-based solutions have been developed to meet WCF-
2 needs, but are not that widely available. In thisregard,certainreservations
exist about employingtawarruqas a general tool for finance; however, the(^1) The exact profit calculation method is based on a somewhat complex formula, but is fully disclosed to the
client, and in addition to the bank-client basic profit distribution formula, involves the use of investment
category weightings to derive weighted average liabilities (among other things). Since the purpose here is
mainly to outline the product, and for need of brevity, a full working cannot be displayed.