Diminishing Musharakah is a type of partnership where one partner gradually purchases the shares of the other partner over time. There are two types: Shirkat-ul-Aqd (joint venture) where partners start a business together, and Shirkat-ul-Milk (joint ownership) where partners jointly purchase an asset. Diminishing Musharakah is commonly used in Islamic banking for house financing through purchase, construction, renovation, or balance transfers, where the bank and client enter a partnership agreement and the client gradually purchases the bank's share of ownership.

2. MUSHARAKAH By Muhammad Yahya Asim DIMINISHING

3. Diminishing Musharakah Diminishing Musharakah (Shirkah-Al-Mutanaqisah) is a type of Shirkah where one partner purchases the other partner’s share gradually

4. Types of Diminishing Musharakah Diminishing Musharakah Shirkat-ul-Aqd (Joint Venture ) Shirkat-ul-Milk (Joint Ownership)

5. FEATURES OF DIMINISHING MUSHARAKAH IN SHIRKAT-UL-AQD (JOINT VENTURE) Two partners start business in Shirkah to EARN PROFIT One of the partners undertakes to purchase the share of another partner gradually every month or each year .

6. Rules of Diminishing Musharakah in Shirkat-ul-Aqd (Joint Venture) There will be an agreement of Shirkat-ul-Aqd between both partners where in investment of everyone and ratio of profit will be agreed. One partner undertakes to purchase the share of other partner, but three conditions should be considered in this undertaking. a) This promise will not be a part of Shirkah Agreement. b) The price of unit will not be agreed in this promise but promise to purchase should be at market value at the time of purchasing. c) If promise is not fulfilled, then it can be forced by Court of law.

7. Rules of Diminishing Musharakah in Shirkat-ul-Aqd (Joint Venture) At the time of purchase, the price of unit will be decided on the basis of market value of business. Unit will be purchased through Offer & Acceptance.

8. FEATURES OF DIMINISHING MUSHARAKAH IN SHIRKAT-UL-MILK (JOINT OWNERSHIP) Two or more partners purchase any asset (machinery, property, etc.) and their intention is that one or both partners will use this asset or rent out their share and one partner undertakes to purchase the share of other gradually.

9. Rules of Diminishing Musharakah in Shirkat-ul-Milk (Joint Ownership) There will be an agreement of Shirkat ul Milk and it will be decided How much investment will be made by each partner. Asset will be purchased and everyone will be owner of this asset as per the ratio of his investment and all other rules of Shirkat-ul-Milk will be applicable.

10. Rules of Diminishing Musharakah in Shirkat-ul-Milk (Joint Ownership) One Shareek can rent out his share to other partner or to a third party and Ijarah Agreement will be signed. Within period of Ijarah, Shariah rulings relating to Ijarah will be applicable.

11. Rules of Diminishing Musharakah in Shirkat-ul-Milk (Joint Ownership ) One of the partners can promise to purchase the share of another partner and in this promise, the price of unit may be decided. Unit can be purchased on the basis of Offer & Acceptance. All the above mentioned agreements and undertaking should be independent and not linked up with each other.

12. Use of Diminishing of Musharakah in current Islamic Banking System

13. Use of Diminishing of Musharakah in Banking System Diminishing Musharakah usually being used in House Financing for four purposes: Purchase of House Construction of House Renovation of House Balance Transfer Facility (BTF)

14. Features for Diminishing Musharakah for Purchase of House The Client in the approved area of the bank makes the choice of house. 2. Bank & client enter into Musharakah agreement. In this agreement it is decided to purchase the house jointly and ratio of investment by each one.

15. Features for Diminishing Musharakah for Purchase of House 3. The property will be in the name of the client. 4. This is Shirkat-ul-Milk. 5. According to the ratio of ownership, each one is responsible for the loss. 6. Bank divides its own part of asset into units, which is promised by the client to purchase on pre-agreed price.

16. Features for Diminishing Musharakah for Purchase of House 7. After taking possession of house, bank rent out its share to the client by execution of Ijarah Agreement. 8. Rent may be fixed on prevailing market rate or with mutual consent. 9. Bank’s monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

17. Features for Diminishing Musharakah for Purchase of House In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain period. Rent for the rest of the period, may be linked with agreed Benchmark. 11. Each unit will be purchased on the basis of Offer & Acceptance.

18. Features for Diminishing Musharakah for Construction of House There are two scenarios : Financing for Purchase of Plot & Construction. Financing only for Construction

19. Financing for Purchase of Plot & Construction Musharakah Agreement will be signed between bank and client in which investment of everyone will be agreed. It will also be agreed that client as working partner will be responsible for construction. Both the partners will be owners of the property in same ratio as the ratio of investment.

20. Features for Diminishing Musharakah for Construction of House 3. The property will be in the name of the client. 4. This is Shirkat-ul-Milk. 5. According to the ratio of ownership, each one is responsible for the loss. 6. Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price

21. Financing for Purchase of Plot & Construction After completion of house, Ijarah Agreement will be signed and bank will give his share of house on rent to the client. Before completion of construction, rent cannot be charged. Rent may be fixed on prevailing market value or with mutual consent. Bank’s monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

22. Financing for Purchase of Plot & Construction In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain period. Rent for the rest of the period, may be linked with agreed Benchmark. 11.Each unit will be purchased on the basis of Offer & Acceptance. 12.Purchase of unit can be started after Musharakah Agreement .

23. Financing for Construction Of House Valuation of plot will be made. This value will be investment of client in Musharakah Agreement and bank’s financing for construction will be investment of bank. Musharakah Agreement will be signed between bank and client in which investment of everyone will be agreed. It will also be agreed that client as working partner will be responsible for construction.

24. Financing for Construction Of House Both the partners will be owner of the property in same ratio as ratio of investment. 4. The property will be in the name of the client. This is Shirkat-ul-Milk. According to the ratio of ownership, each one is responsible for the loss. Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.

25. Financing for Construction Of House After completion of house, Ijarah Agreement will be signed and bank will give his share of house on rent. Before completion of construction, rent cannot be charged. Rent may be fixed on prevailing market value or with mutual consent. Bank’s monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

26. Financing for Construction Of House 11. In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain period. Rent for the rest of the period, may be linked with agreed Benchmark. Before one year, client cannot purchase bank’s units. 13.Each unit will be purchased on the basis of Offer & Acceptance.

27. Features for Diminishing Musharakah for Renovation of House Valuation of house will be made and this value will be treated as investment of client in Musharakah Agreement and renovation amount will be considered as bank’s investment.

28. Features for Diminishing Musharakah for Renovation of House Musharakah Agreement will be signed between bank and client in which investment of everyone will be agreed. It will also be agreed that client as working partner will be responsible for renovation. Both the partners will be owner of the house in same ratio as ratio of investment.

29. Features for Diminishing Musharakah for Renovation of House The property will be in the name of the client. This is Shirkat-ul-Milk. According to the ratio of ownership, each one is responsible for the loss. Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.

30. Features for Diminishing Musharakah for Renovation of House After completion of renovation, Ijarah Agreement will be signed and bank will give his share of house on rent. Before completion of renovation, rent cannot be charged. 9. Rent may be fixed on prevailing market value or with mutual consent. 10. Bank’s monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

31. Features for Diminishing Musharakah for Renovation of House 11.In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain period. Rent for the rest of the period, may be linked with agreed Benchmark. 12. Before one year, client cannot purchase bank’s units. 13. Each unit will be purchased on the basis of Offer & Acceptance.

32. Features for Diminishing Musharakah for BTF This product will be used only in those cases where someone has obtained interest-based loan for house. 2. Valuation of house will be made and this value will be treated as investment of client in Musharakah Agreement and amount of loan paid by bank will be investment of bank.

33. Features for Diminishing Musharakah for BTF Musharakah Agreement will be signed between bank and client in which investment of everyone will be agreed. Both the partners will be owner of the property in same ratio as ratio of investment. The property will be in the name of the client. This is Shirkat-ul-Milk.

34. Features for Diminishing Musharakah for BTF According to the ratio of ownership, each one is responsible for the loss. Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.

35. Features for Diminishing Musharakah for BTF Ijarah Agreement will be signed and bank will give his share of house on rent to the client. Rent may be fixed on prevailing market value or with mutual consent. Bank’s monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

36. Features for Diminishing Musharakah for BTF 12. In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain period. Rent for the rest of the period, may be linked with agreed Benchmark. Before one year, client cannot purchase bank units 14. Each unit will be purchase on the basis of Offer & Acceptance.

37. Jazak Allah