Working Capital Musharakah

Definition of "Working Capital Musharakah"

It is a mechanism for providing working capital to a going concern on PLS basis. In a typical arrangement with a client who owns a factory or a farm and joins the bank to form a limited purpose partnership in which the bank provides 90 per cent capital (or some other proportion) and the client 10 per cent. The partnership then rents the plant or the farm (with its fixed assets) from the client and pays a rental fee at an agreed rate. Then the partnership would use the remainder of the finance made available by the bank and the client as working capital to meet the cost of production in one season which could extend up to 12 months. At the end of the period, the profits are shared in percentage according to the share of capital supplied by each party, after deducting a percentage to the client as remuneration for his managing the operations. The bank usually posts a representative to the plant or the farm to monitor the actual operations. This has been successfully practised in the Sudan by the Islamic banks.