DIMINISHING

MUSHARAKAH
By
Muhammad Hasnain ismail 158
Syed Rehan Ahmad 179
Sheikh Arsalan Elahi 164
Hafiz Muhammad Atif 175
Muhammad Tayab 138
 Diminishing Musharakah

Diminishing Musharakah

(Shirkah-Al-Mutanaqisah) is a type of
Shirkah where one partner purchases the
other partner’s share gradually
Types of Diminishing Musharakah

Diminishing Musharakah
Shirkat-ul-Aqd Shirkat-ul-Milk
(Joint Venture) (Joint Ownership)
FEATURES OF DIMINISHING MUSHARAKAH
IN SHIRKAT-UL-AQD (JOINT VENTURE)

Two partners start business in Shirkah to

EARN PROFIT
One of the partners undertakes to
purchase the share of another partner gradually
every month or each year.
 Rules of Diminishing Musharakah
in Shirkat-ul-Aqd (Joint Venture)

1. There will be an agreement of Shirkat-ul-Aqd between both

partners where in investment of everyone and ratio of profit
will be agreed.

2. One partner undertakes to purchase the share of other partner,

but three conditions should be considered in this undertaking.

a) This promise will not be a part of Shirkah Agreement.

b) The price of unit will not be agreed in this promise but
promise to purchase should be at market value at the time of
purchasing.
c) If promise is not fulfilled, then it can be forced by Court of
law.
 Rules of Diminishing Musharakah
in Shirkat-ul-Aqd (Joint Venture)

3. At the time of purchase, the price of unit

will be decided on the basis of market
value of business.

4. Unit will be purchased through Offer &

Acceptance.
 Rules of Diminishing Musharakah
in Shirkat-ul-Aqd (Joint Venture)
5. Each of the partner entitled to participate
in management.
6. Guarantee of capital by one partner to
another partner is not allowed however
third party can provide guarantee.
7. Profit sharing according to the agreement.
8. Maintenance and insurance are the
liabilities of all the partners.
 Rules of Diminishing Musharakah
in Shirkat-ul-Aqd (Joint Venture)
9. Profit/income/benefit ratios must be
clearly determined.
10. Renting and leasing of the share of other
partner is allowed for a specified amount.
 FEATURES OF DIMINISHING MUSHARAKAH
IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)

Two or more partners purchase any asset

(machinery, property, etc.) and their intention
is that one or both partners will use this
asset or rent out their share and one partner
undertakes to purchase the share of other
gradually.
Use of Diminishing of Musharakah in current
Islamic Banking System
 Islamic House Financing
1. Customer contact IFI for purchase of house as a joint
owner and bank search for a builder
2. Property is purchased in a joint owner ship of bank and
customer
3. Payment in a full of a vender is made by
bank/cash/check or transfer of funds in account of vender
4. House is handedover the customer
5. Customer make periodic payments of a rental to bank
6. Bank enters into sale contract office equity divided into
units of a smaller denomination
7. Customer pay amount of each equity unit purchase from
the bank
 Conventional vs Islamic mortgage
1. Under conventional financing system interest is charged which is
determined on the basis of demand and supply of the capital while
under Islamic financial system rent of the property is charged
2. As conventional banks don’t own the underlying assets hence
sharing of risk and reward of the property is not required while IFI
are co owners of the property
3. Return for conventional banks starts from the date of loan
extension facility which is not the case in IFIs.
4. Conventional banks will continuously receive the installments even
if the property is not useable and it requires repair and
maintainance
5. Return of conventional banks is fixed as intersest while IFIs will
receive rentals as well as the appriciation/depriciation
 Issues in existing practices of IFIs
First and the foremost; it ignores the appreciation
/depreciation in value of property
The second question is determination of rental value in
advance or linking with KIBOR (inflation is hitting)
Third question; what IFIs are demanding from the
customers is rental of the capital on the basis of KIBOR
and not the share of rentals on the base of actual rent of
the property
The another severe critism on IFIs raised by certain
quarters is the linkage of profit percentage with KIBOR.
Finally the fixation of the prices of equity units to be
purchased by client guarantees return of investment of
financier.
Use of Diminishing of Musharakah in Banking System

Diminishing Musharakah usually being used

in House Financing for three purposes:

1. Purchase of House
2. Construction of House
3. Renovation of House
 Features for Diminishing Musharakah for
Purchase of House

1. The Client in the approved area of the bank makes

the choice of house.

2. Bank & client enter into Musharakah agreement. In

this agreement it is decided to purchase the house
jointly and ratio of investment by each one.
Features for Diminishing Musharakah for
Purchase of House
3. The property will be in the name of the
client.
4. This is Shirkat-ul-Milk.
5. According to the ratio of ownership, each
one is responsible for the loss.
6. Bank divides its own part of asset into
units, which is promised by the client to
purchase on pre-agreed price.
 Features for Diminishing Musharakah
for Purchase of House
7. After taking possession of house, bank rent
out its share to the client by execution of
Ijarah Agreement.

8. Rent may be fixed on prevailing market rate

or with mutual consent.

9. Bank’s monthly profit may also be decided,

as monthly rent of the house and principal
amount will be recovered in the unit price.
 Features for Diminishing Musharakah
for Purchase of House

10. In Ijarah Agreement, a lump sum amount of rent

is necessary to be fixed for a certain period.
Rent for the rest of the period, may be linked with
agreed Benchmark.

11. Each unit will be purchased on the basis of Offer

& Acceptance.
 Features for Diminishing Musharakah
for Construction of House

There are two scenarios :

a. Financing for Purchase of Plot &

Construction.

b. Financing only for Construction

 Financing for Purchase of Plot &
Construction

7. After completion of house, Ijarah Agreement

will be signed and bank will give his share of
house on rent to the client. Before completion of
construction, rent cannot be charged.

8. Rent may be fixed on prevailing market value or

with mutual consent.

9. Bank’s monthly profit may also be decided, as

monthly rent of the house and principal amount
will be recovered in the unit price.
Jazak Allah