Diminishing

Musharakah
 Presentation Outline

 Diminishing Musharakah - Introduction

 Basic Structure
 Shariah Principles
 Illustration
 DM in trade & business
 Diminishing Musharakah

In Diminishing Musharakah the Financier/Bank 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
However generally Diminishing Musharakah is used in cases of
Shirkat-ul-Milk
It involves taking share in the ownership of a specific asset and
then gradually transferring complete ownership to the other
partner.
This concept is based on Declining ownership of the financier

three components of DM:

1) Joint ownership of the Bank and Customer
2) Customer as a lessee uses the share of the bank
3) Redemption/Purchase of the Bank’s share by the customer
 Diminishing Musharakah
DM as 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
 Diminishing Musharakah
• 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.
• Upon joint Acquisition of the asset client and bank enters into a
Rental/Lease Agreement through which bank leases its share in asset
to the client.
 Diminishing Musharakah
• Client promises to purchase Bank’s share (units) over the
tenure of transaction with the help of a Unilateral
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 sole owner of the property.
 Shariah
Principles
 Shariah Principles
• To create joint ownership in property is called is 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 one’s share to his partner.

• There is difference of opinion among leasing one’s 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.
 Shariah Principles
Argument:
In the case of promise to sell units of share by financier one might
argue that if the promise to sale has been done before entering into
actual sale This is practically putting a condition on the sale itself

Answer:
There is a difference between: Putting a condition on a sale and
making a separate promise , without making it a condition.
In case of condition, the sale will be valid only if the condition is
fulfilled.
 DM -
Illustration
 DM - Illustration
• Customer request financing for a fixed Asset costing Rs. 10
million.
• Islamic Bank agrees to provide financing up to 90% of the cost.
• Joint Ownership Agreement is executed between bank and
Customer.
• Bank will purchase 90% share in the asset by paying Rs. 9
million to supplier.
• Customers pays its 10% share of Rs.1 million.
 DM - Illustration
Bank’s share is divided into 9 units (e.g facility is for 9 years).
Customer agrees to buyout Bank’s share (units) on yearly basis
and the Undertaking is executed by the customer.
Customer pays the rent for the usage of the Bank’s units after .
Rental reduces after purchase of each unit by the customer.
After 9 years ownership of the asset is completely transferred
to the customer.
 DM in Housing Finance
The arrangement is composed of the following transactions:

1. To create joint ownership in property

2. Giving share of financier to client on rent

3. Promise of client to purchase units of share of financier

4. Purchase of financier’s units

5. Adjustment of rental according of share of financier in property

 DM in Housing Finance
 Diminishing Musharakah may be used for House financing with the
following conditions:

 The agreements of joint Purchase, Lease and Selling of units should not
be tied-up together

 At the time of purchase, sale should be effected through offer and

acceptance

 Preferable to purchase each unit on market value, but permissible to

purchase at agreed price
 DM in Housing Finance
Easy Home - Home Buyer
House Cost Price 1,000,000
Customer Share 400,000 40% Total Units 60
Bank Share 600,000 60% Unit Sale Price 10,000
Profit Rate 8.50% Monthly Rent/Unit 70.83
Tenure in Years 5

Calulation Based on the Schedule as follows

Balance Unit Balance
Months Rent Unit Price Monthly Payment Price Units
0 600,000 60
1 4,250 10,000 14,250 590,000 59
2 4,179 10,000 14,179 580,000 58
3 4,108 10,000 14,108 570,000 57
4 4,038 10,000 14,038 560,000 56
5 3,967 10,000 13,967 550,000 55

56 354 10,000 10,354 40,000 4

57 283 10,000 10,283 30,000 3
58 213 10,000 10,213 20,000 2
59 142 10,000 10,142 10,000 1
60 71 10,000 10,071 0 -
129,625 600,000 729,625
• 600,000/60 (months units) = 10,000 (Unit
Price)
• 600,000 * 8.5% = 51,000 (per Year Rent)
• 51,000/12 = 4,250 (per Month Rent)
• 4250/60 = 70.83 (Per Unit Ren)
 DM - Considerations
 
Consideration Flexibility Available
 Title Holder  Joint Title

Profit Rate Fixed/Variable

Prepayment Allowed Yes
 
Refinance Available Yes
 
Asset Risk Joint
Late Payments Controllable
 Diminishing
Musharakah
based on
Shirkat ul Aqd
 DM in Business of Services
Creating a joint ownership in an asset e.g. Taxi

Musharakah in the income generated through the services of taxi

Purchase of different units of the share of the financier by the

client at market price or at a price that is agreed at the time of
Sale

Sale of unit a pre-agreed price is not permissible.

 Dim Musharakah in Trade
The arrangement is simply a Musharakah whereby two
partners invest different amounts of capital in a joint
enterprise

Purchase of different units of the share of the financier by

the partner at market price or at a price that is agreed at the
time of Sale

Sale of unit a pre-agreed price is not permissible.

 Diminishing
Musharakah
Documentation
 DM - Application
Diminishing Musharakah can be used in the following cases
to provide financing to Corporate customers by Islamic Bank.

For long and medium term fixed asset financing like plant,
equipment, generators etc.

Retail products like Car financing, Durable financing,

Home Financing
 Legal Documentation
1. Musharakah Agreement
  Purpose: This is the main agreement that establishes Bank’s
share in the Musharakah Property.
Components:
- Both parties share
     - Musharakah Property detail
 2. Rent Agreement
Purpose: This agreement is signed after Musharakah
Agreement. Bank rents out its share to the customer via this
agreement.
  Components:
- Rent Schedule
 Legal Documentation
3. Undertaking to Purchase Musharakah Units
  Purpose: This is an undertaking by the customer to purchase
Bank’s Musharakah units from time to time.
  Components:
     - Normal Sale Price
- Additional Unit Purchase Price
 4.  Undertaking to Sell Musharakah Units
  Purpose: This is an undertaking by the Islamic Bank to sell
Bank’s Musharakah units in case of early unit purchase.
  Components:
     - Normal Sale Price
- Additional Unit Purchase Price