The document describes the concept of Diminishing Musharakah, an Islamic financing structure where a bank and customer jointly own an asset. The bank owns most of the asset initially. The customer uses the asset and pays rent to the bank for its share. Over time, the customer purchases shares from the bank until it owns the entire asset. The key components are joint ownership between the bank and customer, the customer leasing the bank's share and paying rent, and gradually redeeming the bank's ownership share through purchase transactions. Diminishing Musharakah is commonly used for house, car, and equipment financing in accordance with Islamic principles of shared ownership.

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Diminishing Musharakah

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Concept
• Bank (as financier) and client participate in joint ownership of a property or etc.
• The share of the financier will be divided into a number of units
• The client will take units of financier on rent and uses the property exclusively.
• The client will purchase these units one by one periodically until he is the sole owner
of the property
• It involves taking share in the ownership of a specific asset and then gradually
transferring complete ownership to the other partner.
• This concept is based on Declining ownership of the financier

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Concept
• Basically there are three main components of Diminishing 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
• Diminishing Musharakah is commonly used in Islamic banks for the purpose of:
– House financing
– Car Financing
– Plant and machinery financing
– All other fixed Assets

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Rules of DM
• To create joint ownership in property is called Shirkat-ul-Milk and is expressly allowed
by all schools of Islamic Jurisprudence.
• There is difference of opinion among leasing one’s undivided share of property to a
third party. But there is no difference on permissibility of leasing that to the joint
partner. 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.

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Rules of DM
• 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.

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Rules of DM
• Difference between Promise and Condition:
– There is a difference between: Putting a condition on a sale and making a separate
promise , without making it a condition.
– In case of condition, the sale will be invalid if the condition is not fulfilled.
– If promise is not fulfilled, the sale will not be invalid.

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CUSTOMERBANK
Joint
Ownership
Musharakah
- 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
Rent
Process Flow of DM

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BANK
Joint
Ownership
Musharakah
Gradual Transfer of Ownership 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)
Process Flow of DM

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DM-Illustration
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.
6. Bank’s share is divided into five units.

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

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DM application for Housing Finance
House Cost Price 1,000,000
Customer Share 400,000 40% Total Units 60
Bank Share 600,000 60% Unit Sale Price 10,000
Profit Rate 8.50% Monthly Rent/Unit 70.83
Tenure in Years 5
Months Rent Unit Price Monthly Payment
Balance Unit
Price
Balance
Units
0 600,000 60
1 4,250 10,000 14,250 590,000 59
2 4,179 10,000 14,179 580,000 58
3 4,108 10,000 14,108 570,000 57
4 4,038 10,000 14,038 560,000 56
5 3,967 10,000 13,967 550,000 55
Easy Home - Home Buyer
Calulation Based on the Schedule as follows

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DM application for Housing Finance
56 354 10,000 10,354 40,000 4
57 283 10,000 10,283 30,000 3
58 213 10,000 10,213 20,000 2
59 142 10,000 10,142 10,000 1
60 71 10,000 10,071 0 -
129,625 600,000 729,625

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JazakAllah o Khair