Two Days Specialized Training Workshop On
Islamic Microfinance
16th & 17th September, 2012 Sana’a, Yemen
DIMINISHING
MUSHARAKHA
Abdul Samad
AlHuda CIBE
Diminishing Musharakah
Diminishing Musharakah
(DM is a type of Shirkah where one
partner purchases the other partner’s
share gradually
FEATURES OF DIMINISHING
MUSHARAKAH
IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)
Two
partners
purchase
any
asset
(machinery/property) and their intention
is that one or both partners will use
this asset or they rent out their share
and one Shareek undertakes to purchase
the share of other gradually.
Rules of Diminishing Musharakah
in Shirkat-ul-Milk (Joint Ownership)
1.
2.
There will be an agreement of Shirkat ul
Milk and it will be decided How much
investment will be made by each partner?
Asset will be purchased and all partners will
be owner of this asset as per ratio of his
investment and all other rules of Shirkat-ulMilk will be applicable.
Rules of Diminishing Musharakah
in Shirkat-ul-Milk (Joint Ownership)
3.
4.
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 Ahkaam
relating to Ijarah will be applicable.
Rules of Diminishing Musharakah
in Shirkat-ul-Milk (Joint Ownership)
5.
6.
7.
One of the partners can promise to purchase
the share of another partner .
Unit can be purchased on the basis of Offer &
Acceptance.
All the above-mentioned agreements and
undertaking should be independent and not
tide-up with each other.
Uses of Diminishing of
Musharakah in IMFI System
Diminishing Musharakah usually being
used in House Financing for these
purposes:



Purchase of House
Construction of House
Renovation of House
Features of Diminishing
Musharakah for Purchase of House
1.
The Client in
the
approved
area of the IMFI
makes
the
choice of house.
Features of Diminishing
Musharakah for Purchase of House
2.
IMFI & client enter into
Musharakah agreement.
In this agreement it is
decided to purchase the
house jointly and ratio of
investment by each one.
Features of Diminishing
Musharakah for Purchase of House
4.
5.
6.
The property will be in the name of the
client.
This is Shirkat-ul-Milk.
According to the ratio of ownership, each
one is responsible for the loss.
Features of Diminishing
Musharakah for Purchase of House
8.
9.
10.
After taking possession of house, IMFI rent out
its share to the client by execution of Ijarah
Agreement.
Rent may be fixed on prevailing market rate or
with mutual consent.
IMFI’s monthly profit may also be decided, as
monthly rent of the house and principal
amount will be recovered in the unit price.
Features of Diminishing
Musharakah for Purchase of House
11.
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.
Each unit will be purchased on
the basis of Offer & Acceptance.
Features of Diminishing
Musharakah for Purchase of House
7.
IMFI divides its own
part of asset into units,
which is promised by
the client to purchase
on pre-agreed price.
Features of Diminishing Musharakah
for Construction of House



There are two scenarios:
Financing for Purchase of Plot &
Construction.
Financing only for Construction.
Financing for Purchase of Plot
& Construction
1.
Musharakah Agreement will be signed
between IMFI 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.
Features for Diminishing Musharakah
for Construction of House
2.
3.
•
Both partners will be
co-owner of the property in
same ratio as ratio of
investment.
The property will be in the name of the client
and mortgaged with the IMFI.
This is Shirkat-ul-Milk.
Financing for Purchase of Plot
& Construction
5.
6.
According to the ratio of ownership, each one
is responsible for the loss.
IMFI will divide its own
part of asset into units,
which is promised by the
client to purchase on
pre-agreed price
Financing for Purchase of Plot
& Construction
7.
8.
9.
After completion of house, Ijarah Agreement will be
signed and IMFI will give its share of house on rent to
the client. Before completion of construction, rent
cannot be charged.
Rent may be fixed on prevailing market value or with
mutual consent.
IMFI’s monthly profit may also be decided, as monthly
rent of the house and principal amount will be
recovered in the unit price.
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.
Financing for Purchase of Plot
& Construction
11.
12.
Each unit will be
purchased on the
basis of Offer &
Acceptance.
Purchase of unit can
be
started
after
Musharakah
Agreement.
Financing Only for
Construction Of House
1.
2.
Valuation of plot will be made. This value will be
investment of client in Musharakah Agreement and
IMFI’s financing for construction will be investment of
IMFI.
Musharakah Agreement will be signed between IMFI
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.
Financing Only for
Construction Of House
3.

5.
6.
The both partners will be owner of the
property in same ratio as ratio of investment.
The property will be in the
name of the client.
This is Shirkat-ul-Milk.
According to the ratio of ownership, each one
is responsible for the loss.
Financing Only for
Construction Of House
7.
IMFI will divide its
own part of asset
into units, which is
promised by the
client to purchase on
pre-agreed price.
Financing Only for
Construction Of House
8.
9.
After completion of house,
Ijarah Agreement will be
signed and IMFI will give
his share of house on rent.
Before
completion
of
construction, rent cannot be
charged.
Rent may be fixed on
prevailing market value or
with mutual consent.
Financing Only for
Construction Of House
10.

IMFI’s monthly profit may also be decided, as
monthly rent of the house and principal
amount will be recovered in the unit price.
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.
Financing Only for
Construction Of House
12.
13.
Before one year, client cannot purchase
IMFI’s units.
Each unit will be purchased on the basis
of Offer & Acceptance.
Features for Diminishing
Musharakah
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 IMFI’s investment.
Features for Diminishing Musharakah
for Renovation of House
2.
3.
Musharakha Agreement will be signed
between IMFI and client in which
investment of everyone will be agreed. It
will also be agreed that client as working
will be responsible for renovation.
The both partners will be owner of the
house in same ratio as ratio of
investment.
Features for Diminishing Musharakah
for Renovation of House
4.
5.
6.
7.
The property will be in the name of the
client.
This is Shirkat-ul-Milk.
According to the ratio of ownership, each
one is responsible for the loss.
IMFI will divide its own part of asset into
units, which is promised by the client to
purchase on pre-agreed price.
Features for Diminishing Musharakah
for Renovation of House
8.
9.
IMFI will divide its own part of asset into units,
which is promised by the client to purchase on
pre-agreed price.
After completion of renovation, Ijarah
Agreement will be signed and IMFI will give his
share of house on rent. Before completion of
renovation, rent cannot be charged.
Features for Diminishing Musharakah
for Renovation of House
10.
11.
Rent may be fixed on prevailing market
value or with mutual consent.
IMFI’s monthly profit may also be
decided, as monthly rent of the house
and principal amount will be recovered in
the unit price.
Features for Diminishing Musharakah
for Renovation of House
12.
13.
14.
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.
Before one year, client cannot purchase IMFI’s
units.
Each unit will be purchased on the basis of
Offer & Acceptance.
Procedure of DM
D M Agreement (IMFI +Client)

Undertaking to Ijarah (from the client)

Sale Agreement (Client + owner of the house)

Payment of Purchase Price (to the client)

Lease Agreement (IMFI + client)
Procedure of Sale and Lease Back
D M Agreement (IMFI +Client)

Undertaking to Ijarah (from the client)

Sale Agreement (IMFI + client)

Payment of Purchase Price (to the client)

Lease Agreement (IMFI + client)
Value of Units at Face Value
Issue
In case of Diminishing
Musharakah IMFI agrees to
sell the units to the client at
face value.
Solution
It is preferred that in all such
transactions
valiuation
should be done either on
market value or any value
agreed at the time of sale of
unit.
Covering Risks Under Takaful
Issue
In DM risks of the leased
assets should be covered
under Takaful arrangement
rather
than
under
conventional
insurance
policies.
Solution
As an islamic financial
Institution, the IMFI should
obtain Takaful for its assets
under DM.
Proportionate Takaful
Issue
Incase
of
combined
ownership model, customer
solely pays the cost of
Takaful.
Solution
Takaful cost should be borne
by
the
partners
in
proportionate
to
their
interest in the asset and not
be solely borne by the
customer.
Repair & Maintenance
Issue
In certain cases repair and
maintenance cost is borne
by the customer.
Solution
The IMFI should pay the
charges of maintenance as
per his shire in DM assts.
192 Ahmad Block, New Garden Town, Lahore - Pakistan.
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