Evaluation of Musharakah Contract Performance in the Banking System of Islamic Republic of Iran

Musharakah as one of the approved financing methods for economic activities by Islam and according to its jurisprudential basis is formed through the blending of partners’ fund. All partners have the right to contribute and monitor and manage the economic activity. One of the major concepts in Musharakah contract is profit-loss sharing (division of profit and loss) proportionately to every partner’s fund at the end of the contract or the economic activity. Major challenges which banks face in the appropriate performance of Musharakah contract are as follow: a) the necessity of supervision and auditing in economic activities, hence using some auditors which end with the increased costs. b) Asymmetric information and lack of confidence towards the income statement prepared by the applicant. c) Uncertainty about the economic activity results, hence market risk. Despite the afore- mentioned challenges, appropriate implementation of Musharakah contract will have desired economic consequences which cover the costs related to these challenges. Some of the desired economic results are: equitable income distribution, decreasing inflationary pressures and decreasing production cost, increasing productivity investment and employment, not needing mortgage, risk diversification. Proper implementation of Musharakah contract and releasing from afore-mentionedchallenges require some solutions such as: Diminishing Musharakah (gradual transferring of bank’s share to the applicant), insurance contracts, considering some special accounts for probable losses, risk diversification of the bank (in order to encounter economic shocks and recession period)