From criticism to confirmation: a definitive examination of Running Musharakah model and its validity

Purpose This study aims to examine the Running Musharakah (RM) financial model used in Islamic banking in Pakistan, evaluating its ability to meet customer financing needs while adhering to Shariah-compliant profit-sharing principles. By conducting a sensitivity analysis, the research assesses the profit distribution mechanism and the impact of key financial variables pertaining to the model. The study also explores structural weaknesses in RM and proposes recommendations for its development into a truly participatory Musharakah model. Design/methodology/approach A comprehensive sensitivity analysis is conducted using Monte Carlo simulations and the one-at-a-time method, where individual variables are analyzed while others remain constant. The study directs the profit distribution models of the practitioners and those of researchers conducted from time to time. It examines RM’s financial behavior through tornado and spider plots to identify key sensitivities and structural flaws. Findings The analysis reveals that RM’s profit-sharing mechanism is not fully aligned with Musharakah principles. While the model ensures the bank achieves its desired profit share, irrespective of fluctuations in key financial variables. The profit allocation between Tier-1 and Tier-2 shifts dynamically, leading to an imbalanced distribution that raises fairness concerns. Additionally, the model allows for potential profit manipulation due to changes in trade receivables, stock valuation and pricing strategies. The study further highlights that RM’s current structure violates Maqasid al-Shariah, as it guarantees a fixed return for banks, contradicting the fundamental Islamic finance principle of risk-sharing. Practical implications Addressing RM’s structural weaknesses can enhance profit distribution fairness, reduce risk exposure for banks and support the transition from conventional to Islamic banking. The findings offer valuable insights for Islamic banking practitioners, policymakers and regulators to develop a more equitable model which could qualify Maqasid al-Shariah as well. Social implications A well-structured Musharakah model can strengthen trust in Islamic banking, promote fair and ethical financial practices and ensure equitable risk-sharing. Its development is essential for public confidence, particularly as all banking system in Pakistan is planned to convert to Islamic banking by 2027. Originality/value This study provides a data-driven critique of structure of RM model, offering quantitative insights into its fairness, profit distribution and compliance with Islamic finance principles. By applying sensitivity analysis and empirical modeling, it reinforces the need for regulatory intervention and full structural reforms.