ISLAMIC MODES

OF FINANCING
Diminishing Musharakah

Learning Outcomes
After this lecture you will be able to understand;
a.The concept of Diminishing Musharakah
b.Features and rules of diminishing Musharakah.
c.Uses of diminishing Musharakah particularly in
House Financing for four purposes:
1.Purchase of House
2.Construction of House
3.Renovation of House
4.Balance Transfer Facility (BTF)

Diminishing Musharakah
It is a type of Shirkah where one partner promises to
purchase the other partners share gradually.

Type of Diminishing
Musharakah
Like Musharakah contract Diminishing Musharakah is also
of two types:

/Diminishing
Musharakah

Shirkat-ul-Aqd
Joint Venture

Shirakat-ul-Milk
Joint ownership

Features of Diminishing
Musharakah
Shirkat-ul-aqd (joint venture)
a)Two partners start business in Shirkah to
earn profits.
b)One of the partners undertakes to
purchase the share of another partner
gradually at regular intervals.

Rules of Diminishing
Musharakah
in Joint Venture:

There will be an agreement of joint venture between

both partners where in investment of everyone and
ratio of profit will be agreed.
One partner undertakes to purchase the share of
other partner, but
three conditions should be
considered in this undertaking.
a) This promise will not be a part of Shirkah
Agreement.
b) The price of unit will not be agreed in this
promise but promise to purchase should be on
offer and acceptance basis for a valid sale
contract (at market value at the time of
purchasing).
c) If promise is not fulfilled, then it can be forced
by Court of law.

Rules of Diminishing
Musharakah
in Joint Venture
a) At the time of purchase, the price of unit will be

decided on the basis of market value of business.

b) Conditions of valid sale transaction must be

observed.
c) Unit will be purchased through Offer &

Acceptance.

Features of Diminishing
Musharakah in Joint
Ownership
a) Two or more partners purchase any asset
(machinery,

property,

etc.)

and

their

intention is that one or both partners will use

this asset or rent out their share and one
partner undertakes to purchase the share of
other gradually.

Rules of Diminishing
Musharakah
in Joint Ownership

a) There will be an agreement of Shirkat ul Milk

and it will be decided How much investment
will be made by each partner.
b) Asset will be purchased and everyone will be
owner of this asset as per the ratio of his
investment and all other rules of Shirkat-ulMilk will be applicable.

Rules of Diminishing
Musharakah
in Joint Ownership
One Shareek can rent out his share to
other partner or to a third party and
Ijarah Agreement will be signed.
Within period of Ijarah, Shariah rulings
relating to Ijarah will be applicable.

Rules of Diminishing
Musharakah
in Joint Ownership
One of the partners can promise to purchase
the share of another partner and in this
promise, the price of unit may be decided.
Unit can be purchased on the basis of Offer &
Acceptance.
All the above mentioned agreements and
undertaking should be independent and not
linked up with each other.

Termination of Diminishing
Musharakah
1. Subject to agreement or by mutual consent of joint owners,
a joint owner may withdraw his share from the joint asset or
property after serving a due notice to other joint owner(s).
2. The withdrawal can be affected by sale or gift to existing
joint owner(s) or to any other person(s). In case of sale, the
parties may agree on face value, book value, agreed value,
or market value.
3. A withdrawal of one or more joint owner(s) shall not lead to
the termination of the joint ownership among remaining
joint owner(s).
4. It is also permissible for the joint owners to agree on
termination of the joint ownership before the agreed period.

Use of Diminishing
Musharakah in the Present
Islamic Banking System

Use of Diminishing of
Musharakah in Banking
System
Diminishing Musharakah is usually used for asset
financing and particularly in House Financing for
four purposes:
1.Purchase of House
2.Construction of House
3.Renovation of House
4.Balance Transfer Facility (BTF)

1. Financing for Purchase of

House
1. The Client in the approved area of the bank
makes the choice of house.
2.

Bank & client enter into Musharakah

agreement. In this agreement it is decided to
purchase the house jointly and ratio of
investment by each other.

1. Financing for Purchase of

House
3.

The property will be in the name of the client.

4.

This is Shirkat-ul-Milk.

5.

According to the ratio of ownership, each one is

responsible for the loss.

6.

Bank divides its own part of asset into units,

which is promised by the client to purchase on
pre-agreed price.

1. Financing for Purchase of

House
7. After taking possession of house, bank rent out
its share to the client by execution of Ijarah
Agreement.
8.

Rent may be fixed on prevailing market rate or

with mutual consent.

9.

Banks monthly profit may also be decided, as

monthly rent of the house and principal amount
will be recovered in the unit price.

1. Financing for Purchase of

House
10. In Ijarah Agreement, a lump sum amount

of rent is necessary to be fixed for a certain

period. Rent for the rest of the period, may
be linked with agreed Benchmark.
11. Each unit will be purchased on the basis of
Offer & Acceptance.

2. Financing for Purchase of

Plot and Construction of House
There are two scenarios in this case:
a.Financing for Purchase of Plot & Construction.
b.Financing only for Construction

2. Financing for Purchase of

Plot & Construction
1.

Musharakah Agreement will be signed between

bank and client in which investment of
everyone will be agreed. It will also be agreed
that client as working partner will be
responsible for construction.

2.

Both partners will be the owners of the property

in same ratio as the ratio of investment.

2 Financing for Purchase of

Plot & Construction
3. The property will be in the name of the client.
4. This is Shirkat-ul-Milk.
5. According to the ratio of ownership, each one
is responsible for the loss.
6. Bank will divide its own part of assets into
units,
7. Which is promised by the client to purchase
on pre-agreed price

2. Financing for Purchase of

Plot & Construction

7. After completion of house, Ijarah Agreement will

be signed and bank will give its share of house
on rent to the client. Before completion of
construction, rent cannot be charged.
8. Rent may be fixed on prevailing market value or
with mutual consent.
9. Banks monthly profit may also be decided, as
monthly rent of the house and principal amount
will be recovered in the unit price.

2. Financing for Purchase of

Plot & Construction

10. In Ijarah Agreement, a lump sum amount of rent

is necessary to be fixed for a certain period. Rent
for the rest of the period, may be linked with
agreed Benchmark.
11. Each unit will be purchased on the basis of Offer &
Acceptance.
12. Purchase of unit can be started after Musharakah
Agreement.

2. Financing for Construction Of

House
1.

Valuation of plot will be made. This value will be

investment of client in Musharakah Agreement and
banks financing for construction will be investment
of bank.

2.

Musharakah Agreement will be signed between bank

and client in which investment of everyone will be
agreed. It will also be agreed that client as working
partner will be responsible for construction.

2. Financing for Construction Of

House
3. Both the partners will be owner of the property
in same ratio as the ratio of investment.
4.

The property will be in the name of the client.

5.

This is Shirkat-ul-Milk.

6.

According to the ratio of ownership, each one is

responsible for the loss.

7.

Bank will divide its own part of asset into units,

which is promised by the client to purchase on
pre-agreed price.

2. Financing for Construction Of

House
8. After completion of house, Ijarah Agreement will
be signed and bank will give his share of house
on rent. Before completion of construction, rent
cannot be charged.
9.

Rent may be fixed on prevailing market value or

with mutual consent.

10. Banks monthly profit may also be decided, as

monthly rent of the house and principal amount
will be recovered in the unit price.

2. Financing for Construction Of

House
11. In Ijarah Agreement, a lump sum amount of rent is
necessary to be fixed for a certain period. Rent for
the rest of the period, may be linked with agreed
Benchmark.
12. Before one year, client cannot purchase banks
units.
13. Each unit will be purchased on the basis of Offer &
Acceptance.

3. Financing for Renovation of

House
1. Valuation of house will be made and this value
will be treated as investment of client in
Musharakah Agreement and renovation amount
will be considered as banks investment.

3. Financing for Renovation of

House
2.

Musharakah Agreement will be signed between

bank and client in which investment of
everyone will be agreed. It will also be agreed
that client as working partner will be
responsible for renovation.

3.

Both the partners will be owner of the house in

same ratio as ratio of investment.

3. Financing for Renovation of

House
4.

The property will be in the name of the client.

5.

This is Shirkat-ul-Milk.

6.

According to the ratio of ownership, each one is

responsible for the loss.

7.

Bank will divide its own part of asset into units,

which is promised by the client to purchase on
pre-agreed price.

3. Financing for Renovation of

House
8. After completion of renovation, Ijarah
Agreement will be signed and bank will give his
share of house on rent. Before completion of
renovation, rent cannot be charged.
9.

Rent may be fixed on prevailing market value or

with mutual consent.

10. Banks monthly profit may also be decided, as

monthly rent of the house and principal amount
will be recovered in the unit price.

3. Financing for Renovation of

House
11. In ijarah agreement, a lump sum amount of rent
is necessary to be fixed for a certain period.
Rent for the rest of the period, may be linked
with agreed benchmark.
12. Each unit will be purchased on the basis of offer
& acceptance.

4. Diminishing Musharakah for

Balance Transfer Facility (BTF)

1.

This product will be used only in those cases

where someone has obtained interest-based loan
for house.

2. Valuation of house will be made and this value

will

consist

of

the

investment

of

client

in

Musharakah Agreement and amount of loan paid

by bank will be investment of bank.

4. Diminishing Musharakah for

BTF
3.
Musharakah Agreement will be signed between
bank and client in which investment of everyone
will be agreed.
4.

Both the partners will be owner of the property in

same ratio as ratio of investment.

5.

The property will be in the name of the client.

6.

This is Shirkat-ul-Milk.

4. Diminishing Musharakah for

BTF
7. According to the ratio of ownership, each one
is responsible for the loss.

8.

Bank will divide its own part of asset into

units, which is promised by the client to
purchase on pre-agreed price.

4. Diminishing Musharakah for

BTF
9. Ijarah Agreement will be signed and bank will
give its share of house on rent to the client.
10. Rent may be fixed on prevailing market value or
with mutual consent.
11. Banks monthly profit may also be decided, as
monthly rent of the house and principal amount
will be recovered in the unit price.

4. Diminishing Musharakah for

BTF
12. In Ijarah Agreement, a lump sum amount of rent
is necessary to be fixed for a certain period. Rent
for the rest of the period, may be linked with
agreed Benchmark.
13. Before one year, client cannot purchase bank
units
14. Each unit will be purchase on the basis of Offer &
Acceptance.

Example:
A wishes to start business of garments but lacks
funds, B agrees to participate with him for a specified
period (2 years). Both invest in the venture 50% each
on a Musharakah basis. Both agree on a profit sharing
ratio and that Bs share will be purchase by A. Bs
share will be divided into 5 equal units and at the
agreed intervals Bs share is purchased by A on the
prevailing market value or any standard agreed
between the partners. Every time a unit is purchase by
A, his share in Musharakah increases and accordingly
the profit sharing is fixed. After the units are purchased
be A, the whole property becomes the asset of A.

Problem
Prepare a schedule of payment by assuming a transaction on
December 01, 2013 between the client and the bank for house
construction whereby the capital invested by bank and the client is,
Rs.5,000,000 (Bank's capital) and Rs.5,000,000 (Client's capital)
respectively. Banks share is divided in 5 units and will be purchased by
the client every six months and rent for the house is fixed at Rs.20,000
per month and it will fixed at the market rates every year during the
proposed time period (suppose a 10% increase in rent every year).
Note that the first installment will be due one year after the client
moves into the house and that the construction will take about six
months and rent will start from July 01, 2014. Installments will be
determined on the market value basis; and the value of the property is
expected to increase by 5% every six months at the time of installment
payment by the client.

Summary of the Lecture

In this lecture we discussed
The concept of Diminishing Musharakah
Features and rules of diminishing Musharakah.
Uses of diminishing Musharakah particularly in
House Financing for four purposes:
1.Purchase of House
2.Construction of House
3.Renovation of House
4.Balance Transfer Facility (BTF)