What is Musharaka Accounting?
Musharaka accounting refers to the financial reporting of shariah-compliant equity partnerships in which two or more parties contribute capital to a venture, share profits according to a pre-agreed ratio, and share losses in proportion to their capital contributions.
How It Works
- Record each partner’s capital contribution as equity in the musharaka venture.
- Recognise the venture’s revenue and expenses separately from the partners’ books.
- Allocate profits at the end of each period using the agreed ratio.
- Allocate losses strictly in proportion to capital contributions.
- Account for diminishing musharaka through periodic equity buy-out by one of the partners.
Saudi Context
Diminishing musharaka is one of the most common Islamic home financing structures offered by Saudi banks supervised by SAMA. The bank’s diminishing share is tracked monthly, and SOCPA-adopted IFRS combined with AAOIFI guidance shapes its accounting.
Example
Bank and customer co-own a property worth SAR 1,000,000 with a 70/30 split. Each month, the customer buys 1% of the bank’s share until full ownership is transferred over 70 months.