Group member 1:

Abeer Azhar
DIMINISHING MUSHARAKAH
CONCEPT OF MUSHARAKAH:

Musharakah is derived from the Arabic word called “Shirkah‟ meaning partnership.

Musharakah means literally sharing and in Islamic jurisprudence it means joint enterprise or
venture formed under contract by mutual consent of the parties for conducting some
business in which all parties share profit according to pre-agreed ratio while loss is shared in
accordance to the ratio of their capital contribution.

TYPES:

There are two types:

1. Shirkat-ul-Milk (Joint ownership)

Joint ownership of two or more persons in a particular property

2. Shirkat-ul-Aqd (Joint Venture)

A partnership affected by mutual contract. It can also be translated as a joint
commercial enterprise.

Shirkat-ul-milk (partnership by joint ownership) this is the joint ownership of

a particular property by two or more parties. This kind of partnership can be
done optionally (Ikhtiar) this is when partners mutually decide to purchase the
property to be owned jointly by them for any purpose. It can also be compulsory
(Ghair ikhtiar) which comes into operation automatically without mutual agreement or
any efforts by the parties. This occurs as a result of death of a person whereby all his
heirs inherit his property and become owners of the property naturally. A property in
Shirkat-ul-milk can be jointly owned and not divided yet; in this case it is called
Musha which can then be used in the following manners,

Mushtarik Intifa using the asset by taking turns,

Muhaya set turns in days and

Taqseem reference to division of the jointly owned asset.

Shirkat-ul-aqd (partnership by contract) also known as joint commercial enterprises, is the
kind of Musharakah which comes into existence by mutual contract for the purpose of being
brief in duration where either the partners share everything equally, i.e. capital, management,
profit and risk are shared equally, this situation is described by the term

 “Shirkat-ul-mufawada” meaning capital and labour at par, or when the partners share the

capital, management, and profit and loss equally, this situation is termed Shirkat-ul-ainan.

Shirkat-ul-aqd can exist in three states; the first state is Shirkat-ul-amwal (partnership in
commercial) where all partners involved allocate the investment capital into commercial
enterprise. The second state shirkat-ul-aamal (partnership in services) is the kind of shirkat-
ul-aqd where all partners mutually agree to provide some service to their customers, this kind
of service provided can be different or linked to each other. The third state shirkat-ul-
wujooh (partnership in goodwill), in this state the partners do not have the investment at all,
they purchase the products on deferred price, by getting capital on loan because of their
goodwill and sell them at spot and distribute the earned profit at an agreed ratio.
DIMINISHING MUSHARAKAH:

Diminishing Musharakah also known as Shirkah-ul- Mutanaqisah is a form co-ownership in

which two or more partners share the ownership of business or tangible asset in identified
proportion where one or more partner undertake to buy the shares of the partners gradually in
instalments until the title of such business or tangible asset is completely owned by the buying
partner(s).The Diminishing Musharakah is a permissible participatory Shariah compliant mode
of finance which is developed near past extracted from Musharakah mode of finance. This mode
of finance complies with Islamic ethics and consideration. It is also an optional (al-khiyar)
contract which tends to reduce or remove Gharar in managing business by making one partner
the sole owner of that business. In Diminishing Musharakah, the participants (financier and its
clients) in either the joint ownership of the asset or joint commercial enterprise have an
agreement that the financier will sell its share to the client which is divided into number of units
to be sold one by one in specific interval.
The process of buying the unit shares increases the share of the client until he becomes the
sole owner of that property or commercial enterprise.

The financier and the client participate either in joint ownership of a property or equipment,
or in a joint commercial enterprise.

The share of financier will be divided in to a number of units, and the client will purchase
these units one by one periodically until he is the sole owner of property.
TYPES OF DIMINISHING MUSHARAKAH:

 As in Musharakah, Diminishing Musharakah is also divided into two types:

 Diminishing Musharakah in Shirkat-ul-aqd (joint venture)
 Diminishing Musharakah in Shirkat-ul-milk (joint ownership)
Diminishing Musharakah in Shirkat-ul-aqd (joint venture), here,
two partners start up a business for the purpose of earning profit
whereby one partner undertakes to buy the others shares gradually in
specific interval. In this contract, no profit or principal is guaranteed
since the business can go into bankruptcy. In this situation, there
should be two different agreements; one is shirkat-ul-aqd agreement
between the two partners with its terms and conditions, agreed
profit ratio and known investment contribution of each partner. The
other agreement is that, one partner will purchase the share of the
other partner using the market price during the time of purchase and
not time of agreement. It should be noted that this promise should not
be a part of Shirkah agreement but if it is not fulfilled, it can be forced
by the court of law.
Group member 02:
Zulekha Karim
RULES OF DIMINISHING MUSHARAKAH:

The following basic rules are to be considered while making arrangement of

Diminishing Musharakah:-

 Apart from applying the concept of halal and haram, Diminishing Musharakah

can be formed only in tangible assets (specified asset) and not the whole
business.
 Having separate agreements on stages in the process of Diminishing
Musharakah, three main stages, creation of Shirkah agreement, arranging the
rent agreement through Ijarah basis and agreement for purchasing the shares
gradually, should be treated differently.
 The proportion of investment shares should be clearly identified, the expenses
regarding ownership shall be borne jointly by the partners to the proportion of
their investment, risk and reward and loss if any, shall be borne to the
proportion of their level of their level of investment shares as well.
 The amount of periodic payment would go on diminishing rate with the purchase
of ownership units by purchasing co-owner where each periodic payment shall
constitute a separate transaction of sale
 In case the co-owner fails to honour his undertaking regarding the periodic payment and
purchase or sale of units as the case may be, the asset shall be sold in open market
and the co-owner aggrieved by such failure shall be entitled to the loss or gain as the
difference between the market price and the price agreed in the undertaking. The co-
owner shall also be entitled to recover the outstanding rental for the whole period
that the other owner has actually used the asset.
APPLICATIONS OF DIMINISHING MUSHARAKAH:

Diminishing Musharakah is applicable in medium projects financing aimed at helping people

and small businesses in purchasing and construction of different properties. The Diminishing
Musharakah was discovered after people and small businesses are faced with difficulties in
meeting some of their individual and business needs. Hence it becomes imperative for these
individuals and small businesses to face the reality about the importance of Diminishing
Musharakah especially in the area of purchase of factory equipment and construction of
landed property. The Diminishing Musharakah helps people to purchase and construct the
properties, use them before the completion of payment and buy them by instalment basis.
Diminishing Musharakah is subjected to specific areas of applications because of its nature; it
involves different separate agreements in overall arrangement, these agreements are Shirkah
agreement, Ijarah agreement and Buy/Sell agreement. The following are the areas that are
suitable for applying Diminishing Musharakah instrument;
 HOUSE FINANCING:

House finance serves four different purposes with different structure. They are as follows:

o Purchase of house
o Construction of house
o Renovation of house
o Balance and Transfer Facility (BTF)
Group member 03:
Amina Karim
 PURCHASE OF HOUSE:

The purchase of house by partners is referred to as Shirkat-ul-Milk (joint ownership). Under

this arrangement, it is allowed for the client to choose the house that he wants at the area
approved by the financer, say Islamic Bank. The Bank and the client can then enter into an
agreement to jointly purchase the house base on an agreed ratio. Hence, the ownership is
vested in the two parties‟ base on the proportion of their contribution to the investment. The
property will be in the name of the client in relation of overall Diminishing Musharakah
arrangement that he is the one who is going to buy the shares of the other partners gradually
and become the sole owner of the business.
 CONSTRUCTION OF THE HOUSE:

The construction of the house is divided into two categories;

 DM financing only for construction

 DM financing for purchase of plot and construction
 DM FOR RENOVATION OF HOUSE:

DM for is an aspect of DM where the house to be renovated will be evaluated to

establish its worth and this determines the clients‟ investment while the amount
needed for the renovation is considered as the financer’s investment. This is also
likened to Shirkat ul Milk where both partners own such project in the same ratio as the
ratio of investment of each partner. It will be also agreed that the client as working
partner is responsible for construction and project will be in the name of the client. The
risk regarding ownership will be shared and the loss if any will be distributed
according to the level of investment
 DM FOR BALANCE TRANSFER FACILITY (BTF)

 This product is used to solve problems occurred when a client has taken interest-
based loan from convectional bank or any other institution to purchase a house.
The client will approach the Islamic Bank and solve this situation using Diminishing
Musharakah Instrument. This is also Shirkah-ul-milk (joint ownership). Under this,
the valuation of the house will be made and the value of the house will be considered
as the investment of the client. And the amount of loan paid by bank will be
the investment of the bank.
Group member 04:
Rubah Fareed
 AGRICULTURE FINANCING:

Diminishing Musharakah is used under agriculture to finance the medium and long term project.
These projects financing are of different types with different structures depending on the type
of project. The following are the areas in which Diminishing Musharakah are mostly used:

 FARM MECHANIZATION AND TRANSPORT

Purchase of tractors and other heavy farm machineries for planting, sowing, pesticide

applications, harvesting etc. It also involves buying of different kinds of transport such as trailers,
trucks, motorcycle etc. This type of financing allows the client to enter into an agreement with
the bank to purchase a truck through Diminishing Musharakah instrument. In buying the truck,
the client is allowed to dictate the features of the truck and make available some amount as his
own share of the investment while the bank make provision for the remaining of the amount for
the investment. The bank will make the unilateral promise of selling its shares to the client. The
Musharakah agreement will be signed and the proportion of investment will be agreed
 LIVESTOCK, DAIRY, FRUIT & VEGETABLE AND FISHING FARMING
FINANCE:

Diminishing Musharakah can also applied in financing purchase of livestock such as cattle,
buffalos, sheep, and construction of sheds, storeroom, construction and improvement livestock
laboratories etc. It can also be applied in the development of dairy livestock farms, milk
processing plants and setting up seeds and milk chilling units. On fishing farming, the
instrument is used to buy the fishing boats, fridges, as well as construction of dams and storage
areas. The process and method of buying and installing different kinds of machineries or
constructions of the buildings is not different from the procedures of buying other machineries
and building constructions as earlier discussed.
 PURCHASE OF VEHICLE, PLANT & MACHINERIES AND
OTHER COMMERCIALPREMISES FINANCING:

Diminishing Musharakah instrument is also applicable in the area of purchase of

vehicles, plants & machinery as well as financing other commercial premises. Mostly
the small business like cab companies, van hiring companies, sewing companies, tours
companies etc. Many companies are approaching the bank for purchasing different
properties using Diminishing Musharakah instrument. The process and procedures
involved are the same with machineries as earlier mentioned.
 •DIMINISHING MUSHARAKAH OPERATIONAL FLOWCHART:

1st
agreement:
BANK CLIENT
joint
ownership of
asset

2nd agreement:

Asset rental

Bank Rent payment

Client
3rdagreement:Gra
dual payment and
transfer of
ownership

Rent
Bank Gradual purchase
Client
Gradual ownership transfer
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.

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

https://www.academia.edu/4246103/Diminishing_Musharakah
Any questions or comments?