First agreement: 

Shirkah agreement between Bank and Client, Ownership will be according
to investment ratio.

Second agreement: Ijarah agreement, the client rents the banks portion

Third agreement: Buy & Sell agreement simultaneously, Client rent and buy back shares
gradually. The property ownership will gradually transfer to the client.

 DIMINISHING MUSHARAKAH FLOWCHART

(EXPLANATION):

The first agreement is between the Islamic bank and the client who wish to buy an asset using
Diminishing Musharakah agreement. The Shirkah by both parties and investment ratio is
agreed. Asset will be owned by both parties in the same ratio as the investment. Profit will be
shared according to agreement while the risk of loss will be distributed according to
investment ratios. The bank will make unilateral promise to sell the asset to the client. The
second is an Ijarah agreement in which the Islamic bank rents out its portion to the client
using market rate and mutual consent and then receives rental payment from the client.
Expenses incurred during renting are borne by both parties in the proportion of ownership
while expenses incurred during usage are borne by the client as lessee. Finally the third
agreement which is the buy/sell agreement, the Islamic bank sells its portion to the client. The
Islamic bank breakdown its portion into smaller units for the client to buy gradually overtime.
Client makes rental payment for the bank’s share at the same time. Overtime the portion
owned by the client increases while rental payment reduces. At a point rent payment halts
when property will be fully owned by client.

CONCLUSION:

The scholars agreed that it is the best to implement DM partnership for house financing or
machinery financing whereby both assets can be leased out to agreed rental.

Joint ownership of house or machinery is accepted by all schools of Islamic Jurisprudence

since the financer sells its share to the customer.

DM is considered to be an appropriate mode to finance collective investment due to benefits

to the respective parties as mentioned below:

 Banker’s perspective: It earns periodical profit all the year round.

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 Partner’s perspective: It encourages the partner to participate in halal investment.
 Society’s perspective: It corrects the course of economy by developing the mode of
positive partnership instead of negative relationship of indebtedness, by doing so it
achieves equity in distributing the result.

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REFERENCES:

http://www.slideshare.net/saufeapai/diminishing-musharakah

https://www.academia.edu/4246103/Diminishing_Musharakah

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