MusharakahThere are two types of Shirkah:1. Shirkat-ul-Milk (Joint Ownership) Joint ownership of two or more persons in a particular property2. Shirkat-ul-Aqd (Joint Venture) A partnership affected by mutual contract. It can also be translated as a joint commercial enterprise
Diminishing MusharakahThe financier and the client participate either in joint ownership of a property or an equipment, or in a joint commercial enterpriseThe share of the financier will be divided into a number of unitsThe client will purchase these units one by one periodically until he is the sole owner of the property
Components ofDiminishing Musharakah 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
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 Operation Joint BANK Ownership CUSTOMER Rent Musharaka 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. Client promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to Purchase
JointBANK Ownership CUSTOMER Gradual Transfer of Ownership Musharaka 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.
JointBANK Ownership CUSTOMER Gradual Transfer of Ownership Musharaka 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)
CONCLUSIONThe scholars agreed that it is 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 school of Islamic jurisprudence since the financier sells its shares to the customer (Usmani, 2002)
DM is considered to be an appropriate mode to finance collective investment due to benefits to the respective parties as mentioned below; o Banker’s Perspective: It earns periodical profit all the year round o Partner’s Perspective: It encourages the partner to participate in halal investment. It realises the customer’s ambition to individually own the asset/project in the short run when the bank withdraws gradually. o Societys Perspective: It corrects the course of the economy by developing the mode of positive partnership instead of the negative relationship of indebtedness, by doing so it achieves equity in distributing the results.