DIMINISHING MUSHARIKA

WHAT IS DIMINISHING MUSHARAKAH

 A financier and his client participate either in the joint ownership of a

property or an equipment, or in a joint commercial enterprise.
 The share of the financier is further divided into a number of units and it is
understood that the client will purchase the units of the share of the financier
one by one periodically, thus increasing his own
share until all the units of the financier are purchased by the
client so as to make him the sole owner of the property, or the
commercial enterprise, as the case may be.
DIMINISHING MUSHARAKAH
ARRANGEMENT
 IT INCLUDES THREE SUBCONTRACTS:
 IN CASE OF ASSET THAT COULD RENDER ANY SERVICE THERE COULD BE THREE
SUBCONTRACTS
 PARTNERSHIP BY OWNERSHIP BETWEEN TWO PERSONS
 LEASING BY ONE PARTNER ITS SHARE IN THE ASSET TO OTHER PARTNER
 SELLING BY ONE PARTNER ITS SHARE TO THE OTHER PARTEN
DIMINISHING MUSHARAKAH
ARRANGEMENT
 IN CASE OF TRADE OF ASSET
 TWO SUBCONTRACTS
 PARTNERSHIP AND SALE
DIMINISHING MUSHARAKAH
ARRANGEMENT
 We can infer from the contemporary juristic opinion that any arrangement in which
three separate agreements of partnership, leasing and sale are made in such a way that
they are not conditional upon one another and are separately enforceable, will be
according to the principles of Shar¯ı´ah and therefore Shar¯ı´ah-compliant. However, if
the three contracts are stipulated collectively, this is not approved by the jurists
DIMINISHING MUSHARAKA WORK FLOW

DM
Agreement
1

Share
Payment
purchase
2
6

Rental Purchase
Repayment of property
5 3

Ijarah
Agreement
4
DIMINISHING MUSHARAKAH

 DIMINISHING MUSHARAKAH IS JUST MUSHARAKAH WITH AN ADDITIONAL

FEATURE OF DECREASING OWNERSHIP OF ONE PARTNER.
 IN THIS TYPE OF MUSHARAKAH THE RATIO OF OWNERSHIP KEEPS CHANGING
 THE CLOSEST TERM FOR DIMINISHING MUSHARAKAH IN CONVENTIONAL
FINANCE IS REDEEMABLE CAPITAL.
DIMINISHING MUSHHARAKA FLOW CHART

Diminishing Musharika Flow Chart

Transfer of title (4)

Mortgage in bank’s favour (5)

Rent & share Repayment (6)

Bank Client
Buyer DM Agreement (1) Buyer

Gradual Ownership (7)

Payment (2)

Ownership & Risk Transfer (3)

Owner/ Seller
Diminishing musharakah explained

 https://www.youtube.com/watch?v=wny0BQ7TWP4
 ACCOUNTING ENTRIES DIMINISHING
MUSHARAKAH
• Advance Against Diminishing Musharika (DR)
Payment • DD-PO ( Favour of vendor) (CR)
to Vendor

• DM Finance (DR) 600,000

DM • Advance against Diminishing Musharakah (CR)
Booking

• Accrued Income on DM (Dr) 8,500

Month End • Income on DM (Cr) 8,500
Accural

• Client Account (Dr) 58,500

Recovery • DM Finance (Cr) 50,000
of • Accured income on DM (CR) 8,500
Instalment
DIMINISHING MUSHARAKAH CASE STUDY
DIMINISHING MUSHARAKAH PRACTICAL
APPLICATION
 HOME FINANCING ON THE BASIS OF DIMINISHING MUSHARAKAH
 DIMINIHING MUSHARAKAH IN SERVICES
 DIMINISHING MUSHARAKAH IN TRADE
HOME FINANCING ON THE BASIS OF
DIMINISHING MUSHARAKAH
 The proposed arrangement is composed of the following
transactions:
1. To create joint ownership in the property (Shirkat-ul-Milk).
2. Giving the share of the financier to the client on rent.
3. Promise from the client to purchase the units of share of the
financier.
4. Actual purchase of the units at different stages.
5. Adjustment of the rentals according to the remaining share
of the financier in the property
DIMINISHING MUSHARAKAH IN SERVICES

 a) Creating joint ownership in a taxi in the form of Shirkat ulMilk. As already

stated, this is allowed in Shariah.
b) Musharakah in the income generated through the services of the taxi. It is
also allowed, as mentioned earlier in this chapter.
c) Purchase of different units of the share of the financier by the client. This
is again subject to the conditions already explained in the case of Home
financing. However, there is a slight difference between Home financing and
the arrangement suggested in this second example. The taxi, when used as a
hired vehicle, normally depreciates in value over time, therefore,
depreciation in the value of the taxi must be kept in mind while determining
the price of the different units of the share of the financier.
DIMINISHING MUSHARAKAH IN TRADE

 1) In the first place, the arrangement is simply a Musharakah whereby two

partners invest different amounts of capital in a joint enterprise.
 2) Secondarily, it entails the purchase of different units of the share of the
financier by the client. This may be in the form of a separate and independent
promise by the client. The requirements of Shariah regarding this promise are the
same as explained in the case of Home financing with one very important
difference. Here the price of units of the financier cannot be fixed in the promise
to purchase, because if the price is fixed before hand at the time of entering into
Musharakah, it will practically mean that the client has ensured the principal
invested by the financier with or without profit, which is strictly prohibited in the
case of Musharakah. Therefore, there are two options for the financier about
fixing the price of his units to be purchased by the client.
DIMINISHING MUSHARAKAH IN TRADE

 One option is that he agrees to sell the units on the basis of valuation of the
business at the time of the purchase of each unit. If the value of the business
increases, the price will be higher and if it decreases the price will be lower.
Such valuation may be carried out in accordance with the recognized
principles through the experts, whose identity may be agreed upon between
the parties when the promise is signed.
• The second option is that the financier allows the client to sell these units
to any body else at whatever price he can, but at the same time he offers a
specific price to the client, meaning thereby that if he finds a purchaser of
that unit at a higher price, he may sell it to him, but if he wants to sell it to
the financier, the latter will be agreeable to purchase it at the price fixed by
him before hand.
USES OF DIMINISHING MUSHARAKAH

 All Purchase of Fixed Assets.

 Home Financing.
 Plant & Factory Financing.
 Car / Transport Financing.
 Project Financing of fixed assets.
CASE STUDIES DIMINISHING MUSHARAKAH

 12.4

 12.5
DIFFERENCE BETWEEN IJARAH AND
DIMINISHING MUSHARAKAH
 IN IJARAH BANK IS LIKE AN PRINCIPAL AND CUSTOMER IS AGENT.WHILE IN
DIMINISHING MUSHARAKAH FINANCIER AND CUSTOMER ARE JOINT OWNER.
 IN IJARAH RENT IS FIXED AND DECIDED AT THE TIME OF AGREEMENT WHILE IN
DIMINISHING MUSHARAKAH RENT IS CHANGED ACCORDING TO OWNERSHIP OF
ASSET.
 OWNERSHIP REMAINED IN THE HAND OF FINANCIER BEFORE THE WHOLE AMOUNT
OF ASSET IS PAID AND AFTER PAYING TOTAL AMOUNT,THE OWNERSHIP TRANSFER
TO THE CLIENT.
 IN IJARAH THE RENT OR ANY PART THEREOFF MAY BE PAYABLE IN ADVANCE
BEFORE THE DELIVERY OF THE ASET TO THE LESSEE,BUT THE AMOUN TSO
COLLECTED BY THE LESSOR SHALL REMAIN WITH HIM AS ON ACCOUNT PAYMNET
AND SHALL ADJUSTED TOWARDS THE RENT AFTER ITS BEIGN DUE.WHEREAS IN
DIMINISHING MUSHARAKAH IT IS PAID TERM WISE WHEN IT IS DUE.
DIFFERENCE OF REPORTING BETWEEN
IASB AND AAOIFI OF MUSHARAKAH
 https://www.youtube.com/watch?v=8sQ0opfnVh8
DIFFERENCE BETWEEN LEASE AND
DIMINISHING MUSHARAKAH
 HOUSE FINANCE CONTRACT
 TERMINATION OF CONTRACT
 RISK OF LOSS
 OWNERSHIP PROVISION
 SALE TRANSFER
 EXPENSE CONSEQUENT TO OWNERSHIP
 SECURITY
 LIABILITY OF BANK AND CLIENT
 RIGHTS OF BANK AND CLIENT
 PENALTY FOR LATE CHARGE
COMPARISON OF ISLAMIC AND CONVENTIONAL
BANKS FOR HOUSE FINANCE

Standard
ALBaraka Standard
Terms and Chartered Meezan
No Islamic Mybank Chartered MCB
conditions (Islamic Bank
Bank (Traditional)
Banking)

Rate “Profit”
Interest for
1 14% to 15% 15% 12% 12% 14.45% 11%
(Salaried)
clients

Rate “Profit”
2 Interest for 14% to 15% 17% 12% 12% 14.95% 11%
Businessmen

Age of
25 to 65 25 to 65 25 to 60 25 to 65
3 borrower 25 to 65 years 25 to 65 years
years years years years
(Salaried)

Age of
25 to 65 25 to 65 25 to 60 25 to 65
4 borrower 25 to 65 years 25 to 65 years
years years years years
(Businessmen)

Rs.20000
5 Income (min) Rs. 20000 Rs. 25000 Rs. 20000 Rs. 20000 (Salaried) Rs. 18000
Rs.50000
COMPARISON CONTINUED
(Businessmen)

1 to 10 1 to 15 3 to 20 3 to 15
6 Tenure 3 to 20 years 3 to 20 years
years years years years
Rs Rs
Rs 300,000 Rs 500,000
Amount min / 400,000 to 300,000 to Rs 300,000 to Rs 500,000 to
7 to Rs20 to Rs 20
max Rs 20 Rs 20 Rs 25 million Rs 20 million
million million
million million
Debt equity
8 60 : 40 80:20 80:20 60:40 60:40 80:20
ratio
9 Insurance Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory
Processing Rs 15000 or
10 Rs 15000 Rs 21000 Rs 10000 Rs 12000 Rs 11000
fees above
Mortgage
11 Yes Yes Yes Yes Yes Yes
deed required
Bank
statement for
12 6 months 6 months 6 months 6 months 6 months 6 months
Salaried client
required

Bank
statement for
13 Business 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year
clients
required

Copy of NIC,
Passport size
14 Yes Yes Yes Yes Yes Yes
Photo graphs
required

Business
15 Proof and job Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory
proof.
DIMINISHING MUSHARAKAH PROBLEM