Diminishing Musharakah

Presentation Outline

Diminishing Musharakah - Introduction

Basic Structure
Shariah Principles
Illustration

Diminishing Musharakah-Introduction

Musharakah

Shirkah means Sharing in the

terminology of Islamic Fiqh.
Musharakah is basically a kind of
partnership in which the partners join
together with their contributions for the
common objective of undertaking
business and trade in accordance with
the principles of Shariah.

Types of Shirkat
It has been divided into two kinds:
SHIRKAT-UL-MILK

It means joint ownership of two or more persons

in a particular property.
SHIRKAT-UL-AQD

Which means a partnership effected by a

mutual contract.

Diminishing Musharakah

Based on Shirkat-ul-Milk
Means joint ownership in a property

Three 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

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
Plant and machinery financing
Factory/Building financing
Agriculture land financing
All other fixed Assets

Musha

Musha means undivided

ownership of the asset

Lease of Musha
It is allowed to lease Musha to

other joint owner.

Basic Transaction Structure

BANK

Joint
Ownersh
Gradual Transfer of Ownership
ip
Musharak
a

CUSTOMER

The customer approaches the Bank with the request for

Project/Machinery 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.

BANK

Joint
Ownersh
Gradual Transfer of Ownership
ip
Musharak
a

CUSTOMER

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.
With each purchase of unit by the customer, the Banks
share in the Musharakah property starts diminishing,
whereas customers 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.

Shariah Principles

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
one-sided promises from one party to
another

Diminishing Musharakah-Considerations

Consideratio
n
Title Holder

Flexibility
Available
Joint Title

Profit Rate

Fixed/Variable

Prepayment Allowed

Asset Risk

Yes

Yes

Joint

Late Payments

Control able

Refinance Available

Diminishing Musharakah can be used for financing

with the following conditions

The agreements of joint purchase, Lease and selling

of units should not be tied-up together
At the time of purchase, sale should be effected
through offer and acceptance
Preferable to purchase each unit on market value,
but permissible to purchase at agreed price

An Illustration

Step by Step Guide

Step 1: Application Form
Submit the filled & signed application form &
cheque for Processing Fee & External Agency cost
Step 2: Required Documents
Attach all the required document
Step 3: Address Verification
Bank will verify the Applicant Residential & Office
Addresses and Addresses of the References
submitted

Step by Step Guide

Step 4: Income Estimation
For Businessman / Self Employed Individuals
Bank's External Consultant may determine
customers monthly income.
For Salaried Individuals
Bank will verify the Income with customers
employer
Step 5: Legal opinion
A legal opinion will be obtained on the property
documents
Step 6: Property Valuation
Appointed Valuation Agency will evaluate the
property to determine its market value.

Step by Step Guide

Step 7: Credit Approval & Sanction Letter
After customer have fulfilled all Credit requirement
satisfactorily, bank will give a conditional Sanction
letter
Step 8: Account Opening
Customer will be required to open an account in
bank by submitting a filled account opening form
Step 9: Signing of House Finance Agreement
Customer sign Islamic House Finance Agreement
and other legal documents.
For Building/Renovation/Replacement of house
Original Property documents will be handed over to
the bank at this stage.

Step by Step Guide

Step 10: Transfer of Property & Disbursement
In Home Buyer Cases
Bank's Sales officer & authorized lawyer will
accompany customer & Seller of the property
to the Registrar office for Property Transfer.
Original Property documents will be handed
over to the Lawyer who, after verification of
the document, will handover the Pay Order to
the Seller and will complete the legal
formalities on Bank's behalf

Key FAQs

What is the difference between the profit

Bank charges and the interest charged in
conventional mortgages?
In conventional mortgages the interest charged
is a mark-up on the money lent. The profit
charged by Bank is the utilization payment for
the consumers use of banks share throughout
the life of the contract. The profit is
predetermined based on market trends.