The document discusses Diminishing Musharakah, an Islamic financing structure used for home and asset financing. It provides an overview of the structure, including that it involves a joint ownership partnership between the bank and customer that diminishes as the customer gradually purchases the bank's share of the asset. The presentation outlines the basic transaction structure, applicable Shariah principles, documentation requirements, and provides an illustrative example of the financing process. It also addresses some frequently asked questions about Diminishing Musharakah and how it differs from conventional mortgages.

1. Diminishing Musharakah
By
Mahmood Shafqat
Senior Joint Director -Islamic Banking Department - SBP
At AlHuda: Centre of Islamic Banking & Economic Workshop
Sheraton Hotel – Karachi. The views expressed in this
presentation are those of the author
and do not necessarily represent State
Bank of Pakistan

2. Presentation Outline
• Diminishing Musharakah - Introduction
• Basic Structure
• Shariah Principles
• Illustration

3. Diminishing Musharakah-Introduction

4. “Shirkah” means “Sharing” in the
terminology of Islamic Fiqh.
Musharakah is basically a kind of
partnership in which the partners join
together with their contributions for the
common objective of undertaking
business and trade in accordance with
the principles of Shari’ah.
Musharakah

5. It has been divided into two kinds:
SHIRKAT-UL-MILK
It means joint ownership of two or more persons
in a particular property.
SHIRKAT-UL-’AQD
Which means “a partnership effected by a
mutual contract”.
Types of Shirkat

6. Based on Shirkat-ul-Milk
Means joint ownership in a property
Three components
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

7. 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
 Factory/Building financing
 Agriculture land financing
 All other fixed Assets
Mode of Fixed Asset Financing

8. Musha means undivided
ownership of the asset
Lease of Musha
It is allowed to lease Musha to
other joint owner.
Musha

9. Basic Transaction Structure

10. 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.
 Customer pays rent for the use of banks share in the
property
 The customer approaches the Bank with the request
for Project/Machinery/House financing
BANK
Joint
Ownership
Musharaka
Rent

11. 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.
 Ownership of the asset is gradually transferred to the
customer upon payment of asset price.
 Customer pays rent for the use of banks share in the
property
BANK
Joint
Ownership
Musharaka
Gradual Transfer of Ownership
 The customer approaches the Bank with the request for
Project/Machinery financing

12.  The value of Bank’s share in Musharakah property is divided
into units, which it sells to the customer. Units will be
worked out by dividing Bank’s financed amount by number
of months for which finance to be allowed.
 With each purchase of unit by the customer, the Bank’s
share in the Musharakah property starts diminishing,
whereas customer’s share starts increasing,
correspondingly.
 Finally, the customer becomes the sole owner of the
property after having purchased all units from the Bank,
along with the rentals thereon.
CUSTOMERBANK
Joint
Ownership
Musharaka
Gradual Transfer of Ownership

13. Shariah Principles

14. Shariah Principles
• 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.

15. 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

16. Diminishing Musharakah-Considerations
Joint
Joint Title
Title Holder
Profit Rate Fixed/Variable
Prepayment Allowed Yes
Refinance Available Yes
Asset Risk
Late Payments Control able
Consideration Flexibility Available

17. • 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
Diminishing Musharakah can be used for financing
with the following conditions

18. 1. Diminishing Musharakah Agreement –
Islamic Housing Finance Agreement
Purpose: This is the main agreement that
establishes Bank’s share in the Musharakah
Property.
Components:
- Both parties share
- Musharakah Property detail
2. Monthly Payment Agreement (Rent
Agreement)
Purpose: This agreement is signed after
Main Musharakah Agreement. Bank gives
out its share to the customer via this
agreement.
Components:
- Rent Schedule
- Formula of calculation
Legal Documentation

19. Legal Documentation
3. Undertaking to Purchase Musharakah
Units
Purpose: This is an undertaking by the
customer to purchase Bank’s Musharakah
units.
Components:
- Normal Sale Price
- Additional Unit Purchase Price
4. Undertaking to Sell Musharakah Units
Purpose: This is an undertaking by the Bank
to sell Bank’s Musharakah units from time to
time.
Components:
- Normal Sale Price
- Additional Unit Purchase Price

20. Personal Information
• Completed and signed Application
Form
• Copy of CNIC
• Copy of Co-Applicant's CNIC /
Passport
• 2 Passport size photos of Applicant /
Co-Applicant's
• Copy of rental docs (if applicable)
• Copy of Paid Utility Bills
• Borrowers Basic Fact Sheet
• Copy of Recent Credit Card Bills
Required Documents

21. Income Information
• Copy of recent Pay Slip / Employer Letter
• Employer Certificate for salaried employees
incl. tenor / designation / salary
• Last 6 months Bank Statement
• Copy of Management Accounts (if applicable)
• Bank Statement of Business
Required Documents
In Case of Co-Applicant the Income
Related documents will also be required
for the Co-Applicant as well.

22. Business / Professional Information
• 3 Years Proof of Business (eg: Tax
Return/Bank Certificate)
• Professional Association Membership
Certificate / Practice License
• Professional Degree / Certificate
Property Documents
• Copy of all related Property Title Documents
• Approved Building Plan
Required Documents

23. • Equitable mortgage of the financed
property.
• Any additional security as may be
determined by Bank.
Such security may be required if the
standing of the borrower does not
meet the credit underwriting
requirements of Bank.
Security

24. An Illustration

25. Step by Step Guide
Step 1: Application Form
Submit the filled & signed application form &
cheque for Processing Fee & External Agency cost
Step 2: Required Documents
Attach all the required document
Step 3: Address Verification
Bank will verify the Applicant Residential & Office
Addresses and Addresses of the References
submitted

26. Step by Step Guide
Step 4: Income Estimation
For Businessman / Self Employed Individuals
Bank's External Consultant may determine
customer’s monthly income.
For Salaried Individuals
Bank will verify the Income with customer’s
employer
Step 5: Legal opinion
A legal opinion will be obtained on the property
documents
Step 6: Property Valuation
Appointed Valuation Agency will evaluate the
property to determine its market value.

27. Step by Step Guide
Step 7: Credit Approval & Sanction Letter
After customer have fulfilled all Credit requirement
satisfactorily, bank will give a conditional Sanction
letter
Step 8: Account Opening
Customer will be required to open an account in
bank by submitting a filled account opening form
Step 9: Signing of House Finance Agreement
Customer sign Islamic House Finance Agreement
and other legal documents.
For Building/Renovation/Replacement of house
Original Property documents will be handed over to
the bank at this stage.

28. Step by Step Guide
Step 10: Transfer of Property & Disbursement
In Home Buyer Cases
Bank's Sales officer & authorized lawyer will
accompany customer & Seller of the property
to the Registrar office for Property Transfer.
Original Property documents will be handed
over to the Lawyer who, after verification of
the document, will handover the Pay Order to
the Seller and will complete the legal
formalities on Bank's behalf

29. Common FAQs
 What method of Islamic Financing is used in
House financing?
 What makes Islamic House financing Shariah
compliant and how does it differ from a
conventional mortgage?
 Why is the profit margin charged by Bank
correlated to the conventional mortgage market
trends?
 How much time do you take to approve the
case?
 Is this rent variable or fixed?

30. Common FAQs
 For how many days can I delay my monthly
installment?
 What would be the Bank’s approach, if I fail to pay
my monthly installment?
 Do you have any alternative for Insurance?
 What is the process for early payment /
termination of property?

31. Key FAQs
What is the difference between the profit
Bank charges and the interest charged in
conventional mortgages?
In conventional mortgages the interest charged
is a mark-up on the money lent. The profit
charged by Bank is the utilization payment for
the consumer’s use of bank’s share throughout
the life of the contract. The profit is
predetermined based on market trends.

32. Ph: 021-9212509, Fax: 021-9212472
Email: mahmood.shafqat@sbp.org.pk
http://www.sbp.org.pk/departments/ibd.htm