Diminishing Musharakah

1. Concept of
Diminishing Musharakah
Introduction to Diminishing
Musharakah
Version 2.0
Release Date:
Jamad ul Thani 31, 1430 H
June 25, 2009
Prepared By:
Product Development and Shariah
Compliance Department

2. • Diminishing Musharakah - Introduction
• Basic Structure
• Shariah Principles
• Illustration
• DM in trade & business
Presentation Outline

3. Musharakah is a form of partnership (Shirkat)
There are two types of Shirkah:
1. Shirkat-ul-Milk
Joint ownership of two or more persons in a
particular property
2. Shirkat-ul-Aqd
A partnership affected by mutual contract. It can
also be translated as a joint commercial enterprise
Musharakah

4. • In Diminishing Musharakah the financier 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

5. Three components of Diminishing Musharaka
 Joint ownership of the Bank and customer
 Customer as a lessee uses the share of the
bank
 Redemption of the share of the Bank by the
customer
Diminishing Musharakah

6. 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
Diminishing Musharakah

7. Basic Structure

8. CUSTOMER
 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.
 Client promises to purchase Bank’s share (units)
over the tenure of transaction with the help of
Undertaking to Purchase
 The customer approaches the Bank with the
request for Project/Machinery/House financing
BANK
Joint
Ownership
Musharaka
Rent

9. CUSTOMERBANK
Joint
Ownership
Musharaka
Gradual Transfer of Ownership
 Client promises to purchase Bank’s share (units)
over the tenure of transaction with the help of
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 owner of the
property.

10. CUSTOMER
 Ownership of the asset is gradually transferred
to the customer upon payment of asset price.
(with the help of a Sale transaction between
bank & customer at the end of each period)
BANK
Joint
Ownership
Musharaka
Gradual Transfer of Ownership

11. Shariah Principles

12. • To create joint ownership in property is called
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

13. • 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

14. Illustration

15. 1. Customer request financing for a fixed Asset
costing Rs. 300 million.
2. Islamic Bank agrees to provide financing up to
90% of the cost.
3. Joint Ownership Agreement is executed between
the bank and the Customer.
4. Bank will purchase 90% share in the asset by
paying Rs. 270 million to supplier.
5. Customers pays its share of Rs. 30 million.
DM - Illustration

16. 6. Bank’s share is divided into five units.
7. Customer agrees to buyout Bank’s share (units) on
yearly basis and the Undertaking is executed by
the customer.
8. Customer pays the rent for the usage of the Bank’s
units .
9. Rental reduces after purchase of each unit by the
customer.
10.After five years ownership of the asset is
completely transferred to the customer.
DM - Illustration

17. THANK YOU