This article is about a method of finance used in Islamic banking. For a type of business incentive plan for employees, see profit sharing.
Profit and Loss Sharing (also called PLS or participatory banking) refers to Sharia-compliant forms of equity financing such as mudarabah and musharakah. These mechanisms comply with the religious prohibition on interest on loans that most Muslims subscribe to. Mudarabah (مضاربة) refers to "trustee finance" or passive partnership contract,[1] while Musharakah (مشاركة or مشركة)[2] refers to equity participation contract.[1] Other sources include sukuk (also called "Islamic bonds")[1] and direct equity investment (such as purchase of common shares of stock) as types of PLS.[1]
The profits and losses shared in PLS are those of a business enterprise or person which/who has obtained capital from the Islamic bank/financial institution (the terms "debt", "borrow", "loan" and "lender" are not used). As financing is repaid, the provider of capital collects some agreed upon percentage of the profits (or deducts if there are losses) along with the principal of the financing.[Note 1] Unlike a conventional bank, there is no fixed rate of interest collected along with the principal of the loan.[3] Also unlike conventional banking, the PLS bank acts as a capital partner (in the mudarabah form of PLS) serving as an intermediary between the depositor on one side and the entrepreneur/borrower on the other.[4] The intention is to promote "the concept of participation in a transaction backed by real assets, utilizing the funds at risk on a profit-and-loss-sharing basis".[2]
Profit and loss sharing is one of two categories of Islamic financing,[2] the other being debt like instruments[5] such as murabaha, istisna'a (a type of forward contract), salam and leasing, which involve the purchase and hire of assets and services on a fixed-return basis.[2] While early promoters of Islamic banking (such as Mohammad Najatuallah Siddiqui) hoped PLS would be the primary mode of Islamic finance, use of fixed return financing now far exceeds that of PLS in the Islamic financing industry.[6][7]
^ abcdKhan, Islamic Banking in Pakistan, 2015: p.91
^ abcd"Islamic Banking. Profit-and-Loss Sharing". Institute of Islamic Banking and Insurance. Archived from the original on 30 July 2012. Retrieved 15 August 2015.
^"PROFIT AND LOSS SHARING Definition". VentureLine. Retrieved 16 August 2015.
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