This document discusses Diminishing Musharakah, an Islamic financing structure where a bank and customer jointly own an asset. The bank's share is divided into units that the customer purchases over time, increasing their ownership until becoming sole owner. It provides examples of assets financed this way like houses, cars, and machinery. The structure involves creating joint ownership, renting the bank's share to the customer, and the customer purchasing units from the bank over time until owning the asset solely. However, combining all transactions into a single arrangement is not allowed in Islamic law as one cannot make one transaction conditional on another.

1. According to this concept a financier and his client
participate either in the joint ownership of a property or an
equipment, or in a joint commercial enterprise. The share
of the financier is further divided into a number of units and
it is understood that the client will purchase the units of the
share of the financier one by one periodically, thus
increasing his own share until all the units of the financier
are purchased by him so as to make him the sole owner of
the property, or the commercial
enterprise, as the case may be.

2. 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

3. Basic Transaction Structure
• 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.
• Customer pays rent for the use of banks share in the
property

4. • 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.

5. House Financing Based on Diminishing Musharakah
The arrangement is composed of the following
transactions:
1. To create joint ownership in the property (Shirkat-ulMilk).
2. Giving the share of the financier to the client on rent.
3. Promise from the client to purchase the units of share
of the financier.
4. Actual purchase of the units at different stages.
5. Adjustment of the rental according to the remaining
share of the financier in the property.

6. Steps in detail of the arrangement
• All schools of Islamic jurisprudence have expressly allowed
arrangement to create a joint ownership in the
property('Shirkat-ul-Milk‘). Therefore no objection can be
raised against creating this joint ownership.
• The arrangement that the financier leases his share in the
house to his client and charges rent from him is also above
board because there is no difference of opinion among the
Muslim jurists in the permissibility of leasing one's undivided
share in a property to his partner but the undivided shares can
be leased out to third person according to Imam Abu Hanifa.
while Imam Malik and Imam Shafi’i, hold that the undivided
share can be leased out to any person. But so far as the
property is leased to the partner himself, all of them are
unanimous on the validity of 'Ijarah'.

7. • The third step in the aforesaid arrangement is that the
client purchases different units of the undivided share of
the financier. This transaction is also allowed.
Now the question is whether this transaction may be
combined in a single arrangement or not?
Answer
The answer is that if all these transactions have been
combined by making each one of them a condition to the
other, then this is not allowed in Shariah, because it is a
well settled rule in the Islamic legal system that one
transaction cannot be made a precondition for another.