 In this module, we would look at an example which is quite close to what is known as running Musharka in Pakistan. It is not exactly the same product as being offered in Pakistan, but that should give an insight into the use of Musharka for something which could be considered as a working capital financing product. The running Musharka in Pakistan offered by some Islamic banks offers a working capital financing based on Musharka. Although based on Musharka, but effectively it offers fake returns to Islamic banks without necessarily exposing them to loss of capital. So this is an important aspect of this application of Musharka which inherently is a profit loss sharing arrangement. However, the way some banks may use Musharka in the context of Islamic retail banking or Islamic business banking, this could generate some fixed returns to the bank effective. Although the terms and conditions of the Musharka would remain unchanged, but the way this whole structure is managed by the banks, it effectively generates fixed returns for the bank. So this could be deemed as an example of risk management in Islamic banking and finance. We have a complete set of segments dedicated to risk management and we might look into this aspect of risk management when we go to that part of the course. So let us look at an example. Company A is seeking working capital finance. This could be a company in manufacturing sector. This could be a company in agriculture sector. It could be in any, it could be in the service industry as well. An Islamic bank may be willing to do so, but without exposing itself to the general risks faced by the company. Islamic banks like banks, they are risk-averse. They would not like to acquire a lot of risk on their book because this is not deemed as good for the stability of the banking system as a whole. And many regulators would not feel comfortable with this kind of behavior if banks start acquiring a lot of asset from the market, a lot of risk from the market. So the bank actually gives a certain amount of money as working capital financing to the company. So because this is based on musharaka, the money given by the bank to the company A must go into financing or building some musharaka assets or a well-defined musharaka slash partnership activity within the business of the company A. Because this is musharaka, the money contributed by the bank should be mixed with the money contributed by the company A into this musharaka activity. In most cases, that musharaka activity within the business already has a value. So that value could be considered as the contribution of company A into the musharaka activity. In case of profitability of musharaka activity, the bank would have its own profit share and the company would benefit from the profit of that musharaka activity as well in accordance with its own profit share. So part of the profit would go to the bank and part of the profit would be retained by the company within its structure. So this is the case when there is some profit generated by the musharaka activity which is a segment of the business within the company A. How is the bank's profit share determined? An Islamic bank and company A agree on profit ratio that is highly in favor of Islamic bank. The profit distribution ratio agreed between the two parties would favor the bank. In this case for example, 10 percent of the profit may go to the company and 90 percent of the profit may go to the bank at least to start with. So if the bank is looking for 10 percent return, it will work like this. Financing amount is 100,000 rupees, expected return to be generated by the bank is 10 percent. Profit from musharaka activity in this scenario one is 50,000. Bank's share would be 45,000 and company's share would be 5000. So this 45,000 bank's share would go to the bank and the company would have 5000 profit retained by itself. Now because the bank was actually looking for only 10 percent return i.e. 10,000 rupees profit in this case, so it would actually have this 10,000 rupees on its own book as its profit and the remaining 5000 would be put into another account within the bank in the reserve pool. So 5000 would go into the reserve pool and the remaining 30,000 from here would go back to the company in the form of the investment. So this would be reinvested in the musharaka asset. Now in case of a loss or in case of a return which is less than the expected rate of return of 10 percent, in this case if the profit from musharaka activity was 10,000, bank's share would be 9,000 because it gets 90 percent and the company's share would be 1000. So company would retain 1000, this 9,000 would go to the bank. Bank is looking for 10,000 hence from the reserve pool that would actually get 1000 would make its total profit of 10,000 dollars which would be the 10 percent return the bank was looking for. At the end the musharaka assets would be valued in most cases the agreement implicit kind of understanding between the bank and the company is that the musharaka assets would be stored back to the business for a price which is equal to the musharaka facility which in this case was 100,000 USD or 100,000 dollars.