profit and loss sharing in islamic framework

The practice of the profit and loss sharing is well-known in economic activities such as sharecropping which has survived in the various parts of the world including the developed country such as the US, UK, Australia and New Zealand. Crop share tenancy is a contractual arrangement which the productive inputs owned by two parties are brought under the same managemnet to produce an output that is shared between them in a pre-arranged proportion. in conventional share contracts, as the name indicates, the leasee of the land or of a fishing equipment pays to the leasor a predetermined share of the current harvest instead of a fixed sum of money or a fixed quantity of produce. Sharecropping method is seen as a device to share such risks between landlords and tenants. this methods allows the parties involved in the contract to temporarily transcend any resource constraints by convening their individually owned resources under a single productive enterprise. if neither party has sufficient

   In a financial contract, there are two active agents which are lenders of funds also referred to as depositors and next is the borrower of funds also referred to as entrepreneurs. Pertaining from that, a bank will be considered an active party to the contract because the bank is generally assumed to play the purely intermediary role in bringing the two parties to the contract together.       As a pure intermediary, the bank provides services for both parties, and it covers its administrative expenses by charging both parties a fee. If in a conventional banking system, the different between lending and borrowing rates of interest includes a profit margin, then this differential exceeds the total administrative fee by the extent of the margin.     This leaves the shares of the active parties to the contract to be determined. To begin with, the mudaraba contract, where all funds are provided by the lenders, will be considered. In musharakah contract, where the entrepreneurs al

PROFIT AND LOSS SHARING : PROFIT AND LOSS SHARING (PLS) is a financial mechanism linking finance capital to industry and commerce without the use of interest. In other word we can say PLS is a  method used in Islamic banking to comply with the prohibition of interest. It suggests an equitable sharing of risks and profits between the parties involved in a financial transaction. so what make it different from conventional ? CONVENTIONAL interest is charged even if the person suffer from losses. Therefore, it is not based on profit and loss sharing.   ISLAMIC BANKING Islamic bank operates on the basis of profit and loss sharing. In case, a person suffered from losses, the bank will share these losses based on Islamic model of finance such as Mudarabah and Musharakah PLS is expected to operate with the borrowers assuming the entrepreneurial role of innovation and control.  The lenders  will be providing the guarantee.  Since bearing uncertainty (so

 MUSHARAKAH  ( Profit sharing) all the partners have to mutually agree on the ratio of profit distribution.  Nevertheless, the jurist have differences of opinion on the issue of whether the ratio of profit should be equal with the ratio of capital contributed by each of the partner. i) Imam Malik and Imam Shafie The opinion that the ratio of profit must be in conformity with the ratio of capital in order for the partnership to be valid. ii) Imam Ahmad bin Hanbal Conversely, the ratio of profit may differ from the ratio of capital on a condition that all the partners must give their consent to the same. iii) Imam Abu Hanifah  Uniquely, he had taken a middle approach. He had resolved that under normal circumstances, the ratio may differ. But, if one partner choose to remain as a sleeping partner, he could only claim for his share of profit  not exceeding his ratio of capital contribution. He further argued that the profit generated  from the musharakah is a result of ca