Profit-And-Loss Sharing (PLS) Modes Of Financing

The most desirable forms of Islamic financing are the PLS modes of Muda^rabah (commenda)42 and Musharkah (partnership). 43 In both of these forms, the financier makes the funds available, not as a lender, but rather as an investor. He shares in the profit or loss and is not assured, in advance, of a positive rate of return irrespective of the ultimate outcome of business. Losses must be shared by him in proportion to his share in the total financing while profits may be shared in any mutually agreed ratio.44 His liability, however, remains limited to the extent of financing provided by him and no more.

Since the shares of joint stock companies embody the PLS principle, they are also acceptable. The presence of a well-organized and properly regulated stock market may enable investors to dispose of such stocks whenever they desire- an advantage which mudârabah and mushârakah financing may not be able to offer. The shares of joint stock companies may also serve as one of the alternatives to interest-bearing government and corporate bonds.

Page last updated: 2019-02-06