Mudharabah and musyarakah models of joint venture investments between two parties

Musyarakah contract is a joint venture between two or more parties and the profit is shared according to the agreed profit sharing ratio. Currently, less than 2% of the financial portfolio of Islamic banks in Malaysia uses this concept although most Muslim economist scholars consider it as a dynamic concept. The paper discusses quatitatively some type of profit and loss sharing contracts that maybe use in managing a joint venture between a capital provider and entrepreneur using mudharabah or musyarakah contracts. It elaborates in the form of mathematical models and argues on the weakness of the model. A new musyarakah model is introduced that uses the compound interest model and two profit sharing ratios to attain a fair and justified investment of a joint venture.