Diminishing Musharakah-ConceptBased on Shirkat-ul-Milk (joint ownership) “ the combination of assets of two or more persons in a manner that creates a state of sharing in the realized profit or income or benefiting from an increase in the value of the partnership assets. This combination of assets for making profit necessitates losses, if any. This partnership is created by the wish of the partners such as when two or more parties acquire common shares in a particular asset.”
Diminishing Musharaka -Explained A diminishing musharaka is a partnership between an IFI and customer who participate in joint ownership of property or Asset Share in ownership of IFI is divided into parts with the understanding that the customer will gradually purchase that share via periodic payments. The objective is for the customer to become the sole owner of the property or enterprise eventually
Diminishing Musharaka – Explained Throughout the financing period, the IFI, as joint owner, must share risks and liabilities associated with ownership Therefore, the IFI’s share in the equity declines each Period through partial return of capital. The financier receives periodic profits based on its reduced equity share that remains invested during the period. The share of the client in the capital steadily increases over time, ultimately resulting in complete ownership of the venture. The profit share of the client goes to the MFI as a repayment of the equity.
Areas of Applications The housing sector has witnessed greater use of diminishing musharaka than any other sector, since the expected profits from this business would be sourced from rentals that are predictable to a considerable degree. It is also observed to be quite promising in the field of microfinance or financing of small and medium enterprises. Purchase of a Farm House with constructed Construction of a
The Transaction and its Flow over Time The Process of the deal Islamic FI Client Jointly Own and buy AssetClient Pays Buys through Monthly Payments = Islamic IFI Receives Rental + Ownership Units Asset becomes the Ownership of Client
DM for MFIs Agreements and Contracts Diminishing Musharakah Agreement Ijarah (Rental) Agreement Agreement To Purchase With the standard documents on unit transfer as purchased from time to time
The steps involved inTransaction1. Customer request an IFI for an Asset Investment.2. IFI agrees to provide financing based on Criteria.3. Joint Ownership Agreement is executed between the IFI and the Customer.4. IFI will purchase its agreed share in the property by paying to the supplier.5. Customers pays his/her share to supplier.
The steps involved in Transaction6. IFI’s share is divided into agreed number of units.7. Customer agrees to buy IFI’s share (units) on a monthly basis and the Undertaking is executed by the customer.8. Customer pays the rent for the usage of the IFI’s units.9. Rental reduces after purchase of each unit by the customer.10. After purchase of all units ownership of the asset is completely transferred to the customer.
Other Features of DM Joint ownership with the client Sharing the profits and losses Parties are Responsible (as a co-owners) for any damage to the structure of the house/property Eligibility criteria, financing limits and profit rates may vary based on assessment and location(s) Flexible in Payments as agreed between the parties Rental Charged when the client gets legal possession of the property
Risk AreasDefault RiskAsset Risk • Destruction of Asset • Death of ClientLegal Issues – Legal Rights of Heirs in case of untimely death – Testing of Documentation in CourtsDelayed PaymentsClients Friendly and flexible
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