Diminishing Musharakah (DM)

Diminishing Musharakah (DM): DM is a form of Musharakah where the financier and the client participate in a joint commercial enterprise / property. In which, all co-owner will have undivided ownership (undivided ownership: means that one partner cannot claim a specific part of the property leaving remaining parts for other partners) on a pro rata basis. Over certain period the equity of financier (divided into equal value units), is purchased by the client. And ultimately the client becomes the sole owner of the enterprise.

Diminishing Musharakah (DM): Procedure:

1.

Client request the bank for DM facility.

2.

Islamic bank will carry out an appraisal, where a credit limit will be assigned for client .
Islamic Bank releases its share to become partner in the business or property. And a contract of Musharakah will be executed b/w Islamic bank and client. [buying &selling will not be stipulated] Islamic bank and the client both will have undivided ownership in the enterprise / property. That means None of the parties can withdraw its equity till the DM is terminated. All General rules of partnership apply

3.

4. 5. 6.

Diminishing Musharakah (DM):

Procedure:
7. 8.

Islamic Bank divides its own part of asset into equal units.
A separate (from Musharakah contract) uni-lateral

promise from client is obtained to purchase the units of

banks equity.
9.

The price of share of equity is valued mutually or at market value but not at face value

10.

In case of property, Islamic bank rent out its share to the

client by execution of Ijarah Agreement.

11.

This Ijarah Agreement can be signed before having the

asset in hand as allowed by Shariah Advisors Rents of

bank diminish with the equity.

Diminishing Musharakah (DM):

Procedure:
13.

In case of

commercial enterprise of

business or services

profit and losses are shared.

14.

Expenses connected to ownership are borne by the partners

proportionately

15.

Equity of bank (divided into units of equal value), will be

purchased by the client periodically according to his promise.

16.

This results in a decrease of Banks share in the rent/profit and

increase clients share.

17.

After last unit purchased by client, he becomes the sole owner of the enterprise. [Banks share reduces to zero]

Diminishing Musharakah (DM):

At the beginning of contract At the end of contract

DIMINISHING MUSHARAKAH
Share in capital Share in capital

1. The Project

Partner
Share Of profits

2
Share Of profits

bank

3. Accruing Profits

Pays the price of the share purchased

Sell its share in Capital

Shariah issues
A lump sum amount of rent is necessary to be fixed for a certain period.

Also the different segments of time may have different rents.

Each unit will be purchased by client with a separate sale contract. In financing for construction,/ renovation of house valuation of plot/ house will be made. That will be consider as the share of client while

financing for construction/ renovation of house will be the share of bank.

In case, where construction/ renovation is needed, before completion,

rent cannot be charged.

Musharakah for BTF could be used only in those cases where someone has obtained interest-based loan for house.

Diminishing Musharakah (DM):

Examples: (Simple case):

1.

A client approached an Islamic Bank for construction of a School in F-8 Islamabad. He has an amount of Rs. 100,000 but the total cost is estimated as Rs. 500,000. How His request can be accommodated by the bank? Bank agrees to participate with client in building of school after an appraisal. 20% of the cost (Rs. 100,000) will be paid by the client and 80% of the cost (Rs. 400,000) by the bank. [Musharakah Contract is signed] The client promises (unilateral promise) to the bank that He will purchase one unit of the share after every two months & He agrees (through agreement to Ijarah) to take the share of bank in the constructed property on rent On completion, the bank owns 80% of the house while the client owns 20%. After completion, the client uses the building for running a School and pays rent to the Bank for using its share in the property. [Ijara contract is signed]

Diminishing Musharakah (DM):

Sale (along with offer & acceptance) is executed at the time of sale of each share

After two months of construction completion, the share of Islamic bank will be divided in 20 equal units, each unit represents 5% of banks ownership (Rs. 20,000) of the house. [sale contract is signed] After the first two month, the client will purchas one unit of the share of the bank by paying Rs. 20,000
It reduces the share of the bank from Rs. 400,000 to 380,000 and increases the share of the client from Rs. 100,000 to 120,000. Hence, the rent payable to the financier is also reduced to that proportion [Rent being Rs. 5000 per month]

Diminishing Musharakah (DM):

At the end of the second two months, he will purchase another unit increasing his share in the property and reducing the share of the Islamic bank as well as the rent also accordingly. This process continues until after the end of 40 months, the client becomes sole owner and equity of bank reduces to zero.

Illustration
Total value of property Share of client Share of Islamic Bank No of units Value of one unit Rent per unit per month =500,000 pkr =100,000 pkr =400,000 pkr (U) =20 units (V) =20,000 pkr (r) =250 pkr