diminishing musharakah_mbl

8/13/2019 Diminishing Musharakah_MBL.

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Outline Diminishing Musharakah - Introduction Basic Structure Shariah Principles Illustration

Diminishing Musharakah


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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 aparticular property

2. Shirkat-ul-AqdA partnership affected by mutual contract. It canalso be translated as a joint commercialenterprise

Musharakah


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In Diminishing Musharakah the financier and theclient 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 anumber of units

The client will purchase these units one by oneperiodically until he is the sole owner of theproperty



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Three components of Diminishing Musharaka

Joint ownership of the Bank and customer

Customer as a lessee uses the share of thebank

Redemption of the share of the Bank by thecustomer



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Basic Structure


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CUSTOMER

The Bank enters into a Musharakah (JointOwnership) agreement with the customer andboth of them pay their respective shares to the

seller of the asset.

Customer promises to purchase Banks share(units) over the tenure of transaction with the help

of Undertaking to Purchase

The customer approaches the Bank with therequest for Project/Machinery/House financing

B NK

JointOwnership

Musharaka Rent


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Shariah Principles


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To create joint ownership in property is calledShirkat-ul-Milk and is expressly allowed by all schoolsof Islamic Jurisprudence.

All Muslim Jurists agree on the permissibility of theFinancier leasing his share in property to client andcharging him rent i.e. the permissibility of leasingones share to his partner.

There is difference of opinion among leasing onesshare to a third part But there is no difference onpermissibility on leasing to a partner.

Shariah Principles


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Promise of client to purchase units of share offinancier is also allowed.

The Transactions cannot be combined in a single

arrangements and they have to be executedindependently.

This is because it is a well settled rule of IslamicJurisprudence that one transaction cannot be made a

condition for another. Instead of making the transactions a pre-conditionfor one another there can be one-sided promises fromone party to another

Shariah Principles


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Illustration I


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1. Customer request financing for a fixed Assetcosting 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 bypaying 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) onyearly basis and the Undertaking is executed by

the customer.8. Customer pays the rent for the usage of the

Banks units .

9. Rental reduces after purchase of each unit by thecustomer.

10.After five years ownership of the asset iscompletely transferred to the customer.

DM - Illustration


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Illustration II


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1.Client makes the choice of the house

Banker

Customer

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2. Bank & client enter into aMusharakah agreement

Shirakat-ul-milk

10%ownership

is ofCustomer

90% ownershipis of Bank

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Value of House:Rs.10,000,000


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3. Bank & client enter into an Ijarahagreement

Bank rented his part to theclient and now client can use

the whole house

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Bank divides its own part ofasset into units, which ispromised by the client to

be purchased on pre-agreed price.

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Payment Calculation

Value of House (Rs.) Rs.10,000,000Tenure in years 10

(Quarterly payment)

Total Payments 40 Parts


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Units to be purchased in each quarter(No. of payment / Banks Share) i.e.40/90

2.25 units

Unit Price = value of house / total unitsi.e. 10,000,000/100

Rs. 100,000

Value of units of each quarter2.25 * 100,000

Rs. 225,000

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Kibor +spread = 14.70%

Installment Date Opening (Rs.)Profit (Rs.)

= (Op.*rate)*(1/4)

value ofunits per Q

totalInstallment

Shirkahoutstanding

capitalclosing

0 01/01/08 9,000,000 0 0 0 9000000

1 31/03/08 9,000,000 33,0750 225,000 555,750 8775000

2 30/06/08 8,775,000 326,868.75 225,000 551,868.75 8550000

3 30/09/08 8,550,000 318,487.5 225,000 543,487.5 8325000

4 31/12/08 8,325,000 312,187.5 225,000 537,187.5 8100000

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Practice Problem Mr. A is a non Muslim client of an Islamic bank

entered into a DM contract of 20 years. For thepurchase of a factory building with equipment's.The worth of the factory is about 100 M and therent of the factory is about 0.5M permonth(rental payments will be made once anyear). The Client will purchase 20% sharesinitially at the time of the contract and rest ofthe share will be purchased on Annual basis.

Required: Calculate the payments Mr. A willmade to IB each of the 20 Years.

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