Domains and Motives of Musharakah Spur in the Islamic Banking Industry of Pakistan

Participatory financing schemes, including Musharakah and Mudarabah, are theoretically claimed to be the ideal modes of Islamic financing, but their practice is restrained by several factors. That is why Islamic banks have a consistent tendency to avoid participatory financing on the assets side throughout the world. However, recently this trend has started changing in Pakistan and Indonesia where the share of participatory finance has raised significantly in the financing portfolio of Islamic banks. The present paper explores this recent spur of participatory finance in Pakistan in terms of its domains of applications and the responsible factors. The findings lead to a novel posteriori framework which shows that the shift toward participatory financing is primarily characterized by increase in working capital financing and commodity operations financing through Musharakah mode Islamic banks. Moreover, five factors contribute to the spur of participatory financing including: (i) introducing varieties in Musharakah, (ii) enhanced applicability, (iii) high volume projects, (iv) government interventions, and (v) regulator’s role. The framework can significantly advance understanding with respect to the implementation theory of participation financing within Islamic banking and related Shariah compliance and regulation.