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Diminishing Musharakah

Diminishing Musharakah is a recent development in Islamic banking and finance sector. 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 till 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.

 

  • A Diminishing Musharakah is a partnership whereby one of the partners undertakes to buy the other partner's share gradually until he owns the entire project. This process consists of partnership in the sale and purchase between the two partners. The partnership contract should not contain a sale and purchase provision in it, but rather the buying partner should give a promise to buy by means of a document separate from partnership contract. In addition, the sale of other partner's share should be made through a contract which is separate from the partnership contract. No condition should be made in a contract in respect of the other contract.
  • Therefore, the financier's share in the equity declines each year through partial return of the capital. The bank receives periodic profit based on its reduced equity share that remains invested during the period. The share of the client in the capital steadily increases over time, ultimately resulting in complete ownership of the venture. The profit share of the client goes to the bank as a repayment of the equity.
  • The housing sector has witnessed a great use of Diminishing Musharakah, since the expected profits from this business would be sourced from the rentals that are predictable to a considerable degree.

    House financing on the basis of Diminishing Musharakah:

  • The proposed arrangement is composed of the following transactions:

      1. To create joint ownership in the property (Shirkat-al-Milk):- The first step in the above arrangement is to create a joint ownership in the property. Shirkat-al-Milk can come into existence in many ways including joint purchase of property by the parties. This has been expressly allowed by all schools of Islamic jurisprudence. Therefore no objection can be raised against creating this joint ownership.
      2. Giving the share of the financier to the client on rent:-
        The second part of the arrangement is that the financier leases his share in the house to his client and charges rent from him. This arrangement is also allowed by the jurist and there is no difference of opinion among them in the permissibility of leasing one's undivided share in a property to his partner. So the concept of Ijarah comes in.
      3. Promise from the client to purchase the units of share of the Financier:-
        The third step in the arrangement is that the client purchases different units of the undivided share of the financier. This transaction is also allowed. If the undivided share relates to both land and building, the sale of both is allowed according to all the Islamic schools. Similarly if the undivided share of the building is intended to be sold to the partner, it is also allowed unanimously by all the Muslim Jurists. Here the concept of Murabahah comes in.
      Each of the above arrangement is allowed by the Shari'ah. But all the three arrangement cannot be combined into a single arrangement. Because according to Islamic Legal System one transaction cannot be made a pre-condition for another.
      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.

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