Presentation Outline

• Diminishing Musharakah - Introduction

Concept of • Basic Structure
Diminishing Musharakah • Shariah Principles
• Illustration
• DM in trade & business

Musharakah

Musharakah is a form of partnership (Shirkat)

There are two types of Shirkah:

1. Shirkat-ul-Milk
Diminishing Musharakah-Introduction
Joint ownership of two or more persons in a particular
property

2. Shirkat-ul-Aqd

A partnership affected by mutual contract. It can also

be translated as a joint commercial enterprise

Diminishing Musharakah- Diminishing Musharakah-

• In Diminishing Musharakah the financier and the
client participate either in joint ownership of
– a property or an equipment, or in a joint
commercial enterprise
• The share of the financier will be divided into a
number of units
¾ However generally Diminishing Musharakah is used in
cases of Shirkat-ul-Milk
¾ It involves taking share in the ownership of a specific
asset and then gradually transferring complete
ownership to the other partner.
¾ This concept is based on Declining ownership of the
financier

• The client will purchase these units one by one
periodically until he is the sole owner of the
property
¾ Three components
9 Joint ownership of the Bank and customer
9 Customer as a lessee uses the share of the bank
9 Redemption of the share of the Bank by the
customer

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 Diminishing Musharakah- Diminishing Musharakah-

Mode of Fixed Asset Financing

Concept of Musha
Diminishing Musharakah is commonly used for the purpose
of financing of fixed assets by various Islamic banks. ¾ Musha means undivided ownership of the asset
9 House financing ¾ Lease of Musha
9 Car Financing
¾ It is allowed to lease Musha to other joint owner.
9 Plant and machinery financing
9 All other fixed Assets

Joint
Ownership
BANK Rent CUSTOMER
Musharaka

Basic Structure
¾ The customer approaches the Bank with the request for
Project/Machinery/House financing

¾ The Bank enters into a Musharakah (Joint Ownership)

agreement with the customer and both of them pay their
respective shares to the seller of the asset.

¾ Customer pays rent for the use of banks share in the

property

Joint
Ownership
BANK Gradual Transfer of Ownership CUSTOMER
Musharaka

Shariah Principles
¾ The customer approaches the Bank with the request for
Project/Machinery financing

¾ The Bank enters into a Musharakah (Joint Ownership)

agreement with the customer and both of them pay their
respective shares to the seller of the asset.

¾ Customer pays rent for the use of banks share in the

property

¾ Ownership of the asset is gradually transferred to the

customer upon payment of asset price. (with the help of a
Sale transaction between bank & customer at the end of
each period)

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 Shariah Principles
• To create joint ownership in property is called is
Shirkat-ul-Milk and is expressly allowed by all schools
of Islamic Jurisprudence.
• All Muslim Jurists agree on the permissibility of the
Financier leasing his share in property to client and
charging him rent i.e. the permissibility of leasing one’s
share to his partner.
• There is difference of opinion among leasing one’s
share to a third part But there is no difference on
permissibility on leasing to a partner.
Shariah Principles
• Promise of client to purchase units of share of
financier is also allowed.
• The Transactions cannot be combined in a single
arrangements and they have to be executed
independently.
• This is because it is a well settled rule of Islamic
Jurisprudence that one transaction cannot be made a
condition for another.
• Instead of making the transactions a pre-condition for
one another there can be one-sided promises from one
party to another

Shariah Principles

Argument:
In the case of promise to sell units of share by financier
one might argue that if the promise to sale has been
done before entering into actual sale This is practically
putting a condition on the sale itself Illustration
Answer:
There is a difference between: Putting a condition on a
sale and making a separate promise , without making it
a condition.
In case of condition, the sale will be valid only if the
condition is fulfilled.

DM - Illustration DM - Illustration

6. Bank’s share is divided into five units.

1. Customer request financing for a fixed Asset
costing Rs. 300 million. 7. Customer agrees to buyout Bank’s share (units) on
yearly basis and the Undertaking is executed by
2. Islamic Bank agrees to provide financing up to
the customer.
90% of the cost.
8. Customer pays the rent for the usage of the Bank’s
3. Joint Ownership Agreement is executed between
units after .
the bank and the Customer.
9. Rental reduces after purchase of each unit by the
4. Bank will purchase 90% share in the asset by
customer.
paying Rs. 270 million to supplier.
10.After five years ownership of the asset is
5. Customers pays its share of Rs. 30 million.
completely transferred to the customer.

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 DM in Housing Finance DM in Housing Finance

Diminishing Musharakah may be used for House

The arrangement is composed of the following financing with the following conditions:
transactions
• The agreements of joint purchase, Lease and
1. To create joint ownership in property
selling of units should not be tied-up together
2. Giving share of financier to client on rent
3. Promise of client to purchase units of share of • At the time of purchase, sale should be
financier effected through offer and acceptance
4. Purchase of financier’s units
• Preferable to purchase each unit on market
5. Adjustment of rental according of share of value, but permissible to purchase at agreed
financier in property price

DM - considerations
Easy Home - Home Buyer
House Cost Price 1,000,000
Customer Share 400,000 40% Total Units 60
Bank Share
Profit Rate
600,000 60%
8.50%
Unit Sale Price
Monthly Rent/Unit
10,000
70.83
Consideration Flexibility Available
Tenure in Years 5
Title Holder Joint Title
Calulation Based on the Schedule as f
Balance Unit Balance
Months Rent Unit Price Monthly Payment Price Units Profit Rate Fixed/Variable
0 600,000 60
1 4,250 10,000 14,250 590,000 59 Prepayment Allowed Yes
2 4,179 10,000 14,179 580,000 58
3 4,108 10,000 14,108 570,000 57
4 4,038 10,000 14,038 560,000 56 Refinance Available Yes
5 3,967 10,000 13,967 550,000 55
Asset Risk Joint
56 354 10,000 10,354 40,000 4
57 283 10,000 10,283 30,000 3 Late Payments Controllable
58 213 10,000 10,213 20,000 2
59 142 10,000 10,142 10,000 1
60 71 10,000 10,071 0 -
129,625 600,000 729,625

DM in Business of Services

• Creating a joint ownership in an asset e.g. Taxi

• Musharakah in the income generated through

Diminishing Musharakah the services of taxi
based on
• Purchase of different units of the share of the
Shirkat ul Aqd financier by the client at market price or at a
price that is agreed at the time of Sale

• Sale of unit a pre-agreed price is not

permissible.

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 Dim Musharakah in Trade

• The arrangement is simply a Musharakah

whereby two partners invest different amounts
of capital in a joint enterprise

THANK YOU
• Purchase of different units of the share of the
financier by the partner at market price or at a
price that is agreed at the time of Sale

• Sale of unit a pre-agreed price is not

permissible.