Maneuvering the Application of Musharakah Contract on Venture Capital

Abstract

Musharakah is a partnership contract in conducting business; based on capital and labour contribution by the investor and entrepreneur through a profit and loss sharing (PLS) agreement. These concepts are also similar to the conventional venture capital principle, which is expanding in Malaysia. According to Ibnu Arfa (1984), Musharakah is an agreement between two or more persons carrying on a particular business to share profits in their investments. However, the use of Musharakah contracts is increasingly being eroded in Islamic banking. This can be proven by looking at the products offered by Islamic financial institutions. Therefore, this study aims to explore the current application of Musharakah contracts on venture capital in Islamic financial institutions. It also explores the possible innovation to improve the application of Musharakah contracts on venture capital. Qualitative research through a systematic review of relevant literature was conducted during this study.