Profit Sharing: Definition, Types, Contracts, and Mechanisms

In business, you may have heard the term profit sharing or profit sharing, where profit sharing is a business agreement between several parties. In addition, the term profit sharing can also be used as a sharia-based bank operating system.

Instead of being confused, let's look at the points below to get a complete understanding of profit sharing.

What is Profit Sharing?

Profit sharing is a system or procedure for sharing business results between fund providers and fund managers, where the system is basically an agreement to share profits from transactions between two parties, including those carried out in Islamic banks.

Types of Profit Sharing Plans

There are three types of profit sharing plans, namely cash or stock plans; dropping packets; and joint plans.

• Cash Packages

You will usually receive severance pay at the end of the year or quarterly, depending on the situation of the company.

The advantage is that employees receive their payments immediately to the company. On the other hand, the disadvantage is that taxes are imposed on workers.

• Deferred Plans

This type refers to profit sharing in the form of a representative fund, such as the provision of certain periodic benefits such as pensions. Therefore, employee income is not taxed directly.

Depending on the term, employees may also receive several investment opportunities. Nominal premiums also increase as employee contributions increase.

• Combined Plan

This third type is a combination of the two previous packages. So some wins are awarded first. But the rest is distributed regularly. Another advantage is that mutual funds have deferred payments that only occur at retirement age.

Strengths and Weaknesses in the Profit Sharing System

In business or banking, a profit sharing scheme certainly has advantages and disadvantages. Remembering that the most important advantage of profit sharing is the transparency of the profits shared between the two parties. So there will be no cheating. In fact, the profit sharing system also functions to avoid losses between the parties.

Even though it has advantages, this profit sharing system also has weaknesses, especially compared to other systems, namely systems that require administrative supervision, especially in relation to reducing the risk of fraud on the part of the parties. The reason is, when there are parties in a business who do not know each other, they are quite vulnerable to this phenomenon.

Profit Sharing System Contract

Apart from knowing the meaning, advantages and disadvantages of profit sharing, you also need to know the various types of profit sharing agreements that are usually used by each party to operate profit sharing schemes.

Why? Because contracts or agreements must be considered before doing business or other things before making a cooperation agreement with other parties. What if they don't know each other.

In this case, Islamic banks usually offer assistance to their customers who wish to implement a profit sharing scheme. This is done with the help of contracts so that the profit sharing system remains safe and transparent.

So part of the profit sharing looks like this:

1. Mudharabah

The first contract included in the profit sharing scheme is Mudharabah. This is agreed between the two parties when investing or doing business together.

Profits obtained from the results of transactions carried out are shared with investors and also with capital management according to the agreement. However, if later there is a loss between them, the Islamic banking system is ready to bear it if it is proven that certain mistakes have occurred. This is of course different from the traditional banking system where in these circumstances only the customer bears the loss but the bank still makes a profit.

In addition, this mudharabah system can also be carried out by one of the donors entrusted by another party.

However, at the beginning of the contract, the sharing of profits for both parties must be discussed. This is done to minimize possible risks such as loss between the parties.

2. Musharaka

Another type of contract contained in payments is Musyarakah. These arrangements are usually made in partnerships involving investors or entrepreneurs.

Generally, this contract system is also used in the Islamic banking system when providing sharia loans or credit to MSME entrepreneurs. The credit funds that exist in the company must be safe and also do not violate existing sharia.

3. Murabaha

The last type of profit sharing contract is Murabaha. This contract system has the principle of buying and selling goods according to the agreement of the parties.

So if someone wants to submit a capital of 15 million rupiah to buy a vehicle such as a motorcycle. After that someone will definitely get a loan from an Islamic bank to buy a motorbike.

However, after granting the loan, the bank struck a deal to resell the motorcycle for Rs 17 million. To be able to repay the motorcycle loan, the borrower must repay it according to the time previously agreed between the borrower and the bank.

This type of murabaha contract is usually used to buy or finance products such as motorized vehicles, houses and even land at high prices.

Profit Sharing Mechanism

After we understand the importance of mutual profit sharing, the next thing you should know is the profit sharing mechanism. So the profit sharing mechanism is as follows:

1. Profit Sharing

Profit sharing is the first type or profit sharing mechanism. This type of profit sharing is a commercial system or mechanism that involves an agreement between parties to share profits from the commercial system.

The profit received by both parties comes from the company's net profit. Thus, this income is offset by various other operational costs, such as production costs, reduced to operational costs.

2. Gross Profit Sharing

Another profit sharing mechanism is gross profit sharing. This type is a multi-party profit sharing agreement system where the income or results are different from the previous type of profit sharing.

Gross profit sharing is a business contract system that distributes profits based on revenue minus cost of goods sold. A simple example is the profit on sales before taxes, marketing costs, administrative costs and other costs. Thus, the income used is still gross profit.

3. Revenue Sharing

The third profit-sharing mechanism is revenue sharing. This type is a profit sharing scheme in which the costs of compensation, operations and the banking system have not been deducted from income. Therefore it is calculated based on the total income from the financial management of each party's company. If we give an example of the sharia system, this system is usually used for the needs of distributing the results of Islamic financial institutions.

However, the profit sharing mechanism that is more commonly used in Islamic banking is usually a net profit sharing mechanism between the creditor and the debtor himself, in which a contract or agreement is made between the two parties.

Therefore, some important information about the profit sharing scheme or profit sharing must be known by prospective business people for prospective Islamic bank customers.