Abstract. The profit sharing ratio in equity financed projects is decided by Islamic banks mainly through applying the relevant rate of return on capital. After first determining the return sought by the bank, the remainder of the expected profit is usually taken as the share of the joint partner, and the proportion adopted as the profit sharing ratio.Ideally, the profit sharing ratio should be decided through a mutual process considering the contributions of both partners, with due recognition of the level of liability each had borne. The period, as a factor common to the joint venture, could be redundant. Hence, the profit sharing ratio should be reflective of the capital and labour outlay of both the bank and the client, to the extent possible.In view of the socio-economic function expected of Islamic banks, the method for profit ratio calculation adopted should adequately consider the actual contributions of both partners. Two bases possible are giving capital and labour of both partners equal weightage, and giving capital a weightage different from labour.
From a Shari’ah perspective, no essential difference is noticed between public welfare waqf and a waqf created for the benefit of individuals such as descendants and family of a person, and both are treated as recommended avenues for voluntary gratuitous transfer of benefits. Over the centuries, family awqaf have degenerated due to various social and political factors. Under the influence of the English law that regards family trusts as non-charitable, family awqaf have been treated as non-charitable institutions, and have been deprived of the privileges and immunities granted to charitable awqaf. In this context, the current article discusses the essential nature of such awqaf with regard to their position in Islamic law and history as well as their social significance, and attempts to shed light on the degeneration that took place in the recent past, while exploring means of revival. It finds that the creation of endowments for specific beneficiaries such as waqf for those related to the endower is a recognised form of charity in Islamic law, that function as public serving entities directly or indirectly. Issues encountered in such awqaf do not necessitate denying their multiple advantages. Providing the necessary legal regulation and administrative framework as well as tax exemption for all awqaf could go a long way in promoting the cause of waqf.
Maintenance of waqf assets and keeping them in a productive state is emphasized in Islamic legal literature. In addition to traditional avenues, jurists have sanctioned certain special modes for sustaining awqūf, in order to ensure their continuance. Due to the specific legal nature of waqf assets in sharī‘ah, some contemporary modes of financing are not readily practicable in the context of waqf. Equitybased financing modes where a joint venture is initiated with the waqf assets forming part of the joint capital are not acceptable, as such modes involve partial transfer of waqf-ownership. Decreasing partnership and other formats proposed may be used for financing some waqf projects, with due observance of sharī‘ah guidelines. Due to concerns that arise in certain modes principally relating to the issue of ownership, formats based on ijūrah and istisnūʿ appear best suited for financing awqūf.
Equity participation in joint ventures as envisaged in Shari‘ah consists of a business relationship based on mutual sharing of gains and liability. Such partnerships as prevalent in every sphere of commerce generally involve the possibility of unlimited gains for each partner in theory, without limitations attached to the amount of return to any single partner. A central pillar of the equity structure in Shari‘ah is the unbridled operation of the profit sharing ratio. Restriction of its application to a stipulated level of profits, thereby enabling a partner to claim unlimited profits while the profit share of the other is restricted to a maximum ceiling cannot be regarded to be consistent with the theory of equity participation. While such measures could realise some temporary benefit to Islamic banks, with continued practice, they could become deep-rooted in the concept of equity financing itself, thus making it operate subservient to debt financing norms. Islamic banks should attempt to alienate their identity from being lending institutions, a pioneer step towards which would be to implement a dynamic profit and loss sharing mechanism.
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