Mucharaka

Product operation

The mucharaka, like the mudaarabah is based on the principle of sharing profits and losses. It is a partnership between one or more participants who invest in a stake in a project or a company.

Each partner has the right to take an active part in the administration and management of the company or project and has a right to make decisions equal to the height of his shareholding.

Net profits are shared according to terms approved by all participants at the signing of the contract. If there is no profit or even loss of capital, all participants share the losses in the same proportions as their investment.

There are several types of mucharaka : Whole (Described above) and decreasing. One that will hold our attention here is the mucharaka digressive is the most commonly used.

This form allows investors to reduce their shareholding in a decreasing basis and approved by all participants in the signing of the contract (A schedule is established in advance before signing the contract).

This enables banks to invest in a project to gradually decrease their stakes in the projects.

The principle is simple:

• A proportion of profits allocated to shares of the entrepreneur is kept in an escrow account;
• Once the money becomes equivalent to the shares held by the financier, they are then sold to the contractor (or contractors if they are several)(1).

In addition, one of the advantages of mucharaka is that it is not necessary for entrepreneurs to provide collateral(2) or a bond.

The mucharaka can be equated a joint venture or association between multiple partners, its legal form should be treated as an equity loan in France.

Regulatory aspects, legal and tax treatment in France

The mucharaka goes "approach in the context of the system of equity loans governed by the Monetary and Financial Code(3).

It provides that the lender is not necessarily a credit institution, he may be remunerated with a fixed and a variable(4) and finally, that "in case of liquidation or receivership by assignment of the debtor, equity loans are repaid after complete disinterest of all other secured creditors or participating.

From a tax perspective, the equity loan scheme allows the deductibility of interest paid by the borrower. In the case of mucharaka, Correspond to the interests of capital repayment plus a premium by the contractor or contractors to the bank or investment firm.

Finally, there is a point that is currently being debated in the literature concerning the withholding tax on interest paid to lenders outside of France(5). In order to allow foreign capital to invest in products mucharakaIt would be desirable that such withholding tax is eliminated.

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(1) This proposal was discussed and approved as an authorized method of financing at the first international conference on Islamic Finance held in Dubai in 1979.

(2) "The experience of the Sudanese Islamic Bank in Partership Financing" (B. Badawi Osman) shows that the development of Islamic banks in Sudan has helped the sector of agriculture unprecedented growth thanks to the use of musharaka. Conventional banks, contrary to Islamic banks, refused to invest in this sector due to lack of collateral.

(3) Article L313-13 et seq.

(4) The remuneration of the lender will pay down its stake, that is to say the repayment of capital plus a premium in respect of its participation. Article L313-19 of the Monetary and Financial Code stipulates that "the fixed interest on the equity loan is increased under conditions that are determined by the contract, by operation of a right to participate, particularly benefiting the borrower.

(5) Source: Gilles Saint Marc, Europlace