Diminishing Musharakah

Diminishing Musharakah
(Shirkah-Al-Mutanaqisah) is a type of Shirkah

where one partner purchases the other partners share gradually 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.

Types of Diminishing Musharakah

Diminishing Musharakah
Shirkat-ul-Aqd (Joint Venture) Shirkat-ul-Milk (Joint Ownership)

Three major 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

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)
1.

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. One Shareek can rent out his share to other partner or to a third party and Ijarah Agreement will be signed. (Sharia rules) Within period of Ijarah, Shariah rulings relating to Ijarah will be applicable.

2.

3.

4.

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)
5.

One of the partners can promise to purchase the share of another partner and in this promise, the price of unit may be decided. (It will be preferable that the purchase of different units by the client is effected on the basis of the market value of the house as prevalent on the date of purchase of that unit, but it is also permissible that a particular price is agreed in the promise of purchase signed by the client. )
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.

6. 7.

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 for the personal use or for rendering services i.e. taxi Plant and machinery financing Factory/Building financing Agriculture land financing All other fixed Assets

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.

Rules of Diminishing Musharakah in Shirkat-ul-Aqd (Joint Venture)

1. There will be an agreement of Shirkat-ul-Aqd between

both partners where in investment of everyone and ratio of profit will be agreed. 2. 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.

Rules of Diminishing Musharakah in Shirkat-ul-Aqd (Joint Venture)

3. At the time of purchase, the price of unit

will be decided on the basis of market value of business.

4. Unit will be purchased through Offer &

Acceptance.

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 Ownership of the asset is gradually transferred to the customer upon payment of asset price.

 The value of Banks share in Musharakah property is

divided into units, which it sells to the customer. Units will be worked out by dividing Banks financed amount by number of months for which finance to be allowed. Banks share in the Musharakah property starts diminishing, whereas customers share starts increasing, correspondingly.

With each purchase of unit by the customer, the

Finally, the customer becomes the sole owner of the

property after having purchased all units from the Bank, along with the rentals thereon.

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 ones share to his partner. There is difference of opinion among leasing ones share to a third part But there is no difference on permissibility on leasing to a partner.

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 precondition for one another there can be onesided promises from one party to another