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Introduction to Diminishing

Musharakah
Concept
Version 2.0
of
Diminishing Musharakah
Release Date:
Jamad ul Thani 31, 1430 H
June 25, 2009

Prepared By:
Product Development and Shariah
Compliance Department
Presentation Outline

Diminishing Musharakah - Introduction


Basic Structure
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

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

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

The client will purchase these units one by one


periodically until he is the sole owner of the
property
Diminishing Musharakah

Three components of Diminishing Musharaka

Joint ownership of the Bank and customer


Customer as a lessee uses the share of the
bank
Redemption of the share of the Bank by the
customer
Diminishing Musharakah

Mode of Fixed Asset Financing

Diminishing Musharakah is commonly used for the


purpose of financing of fixed assets by various
Islamic banks.
House financing
Car Financing
Plant and machinery financing
All other fixed Assets
Basic Structure
Joint
Ownership
BANK Rent CUSTOMER
Musharaka

The customer approaches the Bank with the


request for Project/Machinery/House financing
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.

Client promises to purchase Banks share (units)


over the tenure of transaction with the help of
Undertaking to Purchase
Joint
Ownership
BANK Gradual Transfer of Ownership CUSTOMER
Musharaka

Client promises to purchase Banks share (units)


over the tenure of transaction with the help of
Undertaking to Purchase
Customer pays rent for the use of banks share
in the property
Client purchases the units every month via a
separate offer & acceptance every month and
will eventually become the owner of the
property.
Joint
Ownership
BANK Gradual Transfer of Ownership CUSTOMER
Musharaka

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)
Shariah Principles
Shariah Principles

To create joint ownership in property is called


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
ones share to his partner.

There is difference of opinion among leasing ones


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
Illustration
DM - Illustration

1. Customer request financing for a fixed Asset


costing Rs. 300 million.
2. Islamic Bank agrees to provide financing up to
90% of the cost.
3. Joint Ownership Agreement is executed between
the bank and the Customer.
4. Bank will purchase 90% share in the asset by
paying Rs. 270 million to supplier.
5. Customers pays its share of Rs. 30 million.
DM - Illustration

6. Banks share is divided into five units.


7. Customer agrees to buyout Banks share (units) on
yearly basis and the Undertaking is executed by
the customer.
8. Customer pays the rent for the usage of the
Banks units .
9. Rental reduces after purchase of each unit by the
customer.
10.After five years ownership of the asset is
completely transferred to the customer.
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