diminishing musharakah concept
TRANSCRIPT
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Concept of
Diminishing Musharakah
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Diminishing Musharakah - Introduction Basic Structure
Shariah Principles
Illustration
DM in trade & business
Presentation Outline
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Diminishing Musharakah-Introduction
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Musharakah is a form of partnership (Shirkat)
There are two types of Shirkah:1. Shirkat-ul-Milk
Joint ownership of two or more persons in a particular property
2. Shirkat-ul-Aqd
A partnership affected by mutual contract. It can also be translated as a
joint commercial enterprise
Musharakah
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In Diminishing Musharakah the financier and the client participate
either in joint ownership of
a property or an equipment, or in a joint commercial enterprise
The share of the financier will be divided into a number of units
The client will purchase these units one by one periodically until he
is the sole owner of the property
Diminishing Musharakah
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However generally Diminishing Musharakah is used in cases of Shirkat-
ul-Milk
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
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
Diminishing Musharakah
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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
All other fixed Assets
Diminishing Musharakah
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Concept of Musha
Musha means undivided ownership of the asset
Lease of Musha
It is allowed to lease Musha to other joint owner.
Diminishing Musharakah
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Basic Structure
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CUSTOMER
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
The customer approaches the Bank with the request for
Project/Machinery/House financing
BANK
Joint
Ownership
Musharaka
Rent
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CUSTOMER
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.
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)
Customer pays rent for the use of banks share in the property
BANK
Joint
Ownership
Musharaka
Gradual Transfer of Ownership
The customer approaches the Bank with the request for
Project/Machinery financing
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Shariah Principles
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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
Shariah Principles
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Argument:
In the case of promise to sell units of share by financier one might argue
that if the promise to sale has been done before entering into actual sale
This is practically putting a condition on the sale itself
Answer:
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 valid only if the condition is fulfilled.
Shariah Principles
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Illustration
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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.
DM - Illustration
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6. Banks share is divided into five units.
7. Customer agrees to buyout Banks share (units) on yearly basisand the Undertaking is executed by the customer.
8. Customer pays the rent for the usage of the Banks units after .
9. Rental reduces after purchase of each unit by the customer.
10. After five years ownership of the asset is completely transferred to
the customer.
DM - Illustration
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The arrangement is composed of the following transactions
1. To create joint ownership in property
2. Giving share of financier to client on rent
3. Promise of client to purchase units of share of financier
4. Purchase of financiers units
5. Adjustment of rental according of share of financier in property
DM in Housing Finance
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Diminishing Musharakah may be used for House 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 topurchase at agreed price
DM in Housing Finance
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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 14,250 590,000 592 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
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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Joint
Joint TitleTitle Holder
Profit Rate Fixed/Variable
Prepayment Allowed Yes
Refinance Available Yes
Asset Risk
Late Payments Controllable
Consideration Flexibility Available
DM - considerations
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Diminishing Musharakah
based on
Shirkat ul Aqd
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Creating a joint ownership in an asset e.g. Taxi
Musharakah in the income generated through the services of taxi
Purchase of different units of the share of the financier by the clientat market price or at a price that is agreed at the time of Sale
Sale of unit a pre-agreed price is not permissible.
DM in Business of Services
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The arrangement is simply a Musharakah whereby two partners
invest different amounts of capital in a joint enterprise
Purchase of different units of the share of the financier by the
partner at market price or at a price that is agreed at the time of
Sale
Sale of unit a pre-agreed price is not permissible.
Dim Musharakah in Trade
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