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May 24, 2010
POINTERS: Musharakah Risk Management
Musharakah
Is a form of business that is concluded between two or several parties through a joint venture. Profits & losses are shared between the parties that have the right to participate in the management of business. The diagram shows a typical Musharakah contract:
Credit Risk-Management
-Conducting extensive feasibility study prior to entering the contract.
-Active management in Musharakah partnership.
-Sale of collateral/ last equities.
Operational Risk Management
-Active management in Musharakah partnership.
-Shariah compliance from pre to post approval.
-Takaful.
Market Risk Management
-Defining a strategy for sale of last equity price.
Liquidity Risk Management
-Maintaining additional capital reserves.
Example
In a Musharakah between Islamic Bank and a customer for manufacturing of cycle tubes and tyres, a sharp decline in demand would expose Islamic Bank to operational risk. Islamic Bank would be exposed to credit risk in-case it doesn’t get its agreed share of profits and market risk in-case of huge loss.
(COURTESY: Taken from "Handbook of Islamic Banking (2nd Edition)" to be published towards end of 2011, by Edward Elgar Publishers)
Posted by fahadzafar at May 24, 2010 12:28 PM
What is the IFI in the diagram?
Posted by: Humphrey at June 25, 2010 09:20 PM
Do we really need to talk about a system that takes us back 1500 yr?
Posted by: Amrinder at June 30, 2010 09:20 PM
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