diminishing musharakah concept

8/12/2019 Diminishing Musharakah Concept

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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



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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



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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



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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.



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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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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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THANK YOU

diminishing musharakah concept

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