Diminishing Musharakah Case Study

What is Diminishing Musharakah?

Diminishing Musharakah is a type of partnership (shirkah) where one partner purchases the other partner’s share gradually. It is also called Shirkah-al-Mutanaqisah. According to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share until all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.

Fundamentals of Diminishing Musharakah Agreement:

The proposed arrangement is composed of the following transactions:

  • To create joint ownership in the property (Shirkat-ul-Milk).
  • Giving the share of the financier to the client on rent.
  • Promise from the client to purchase the units of share of the financier.
  • Actual purchase of the units at different stages.

How Diminishing Musharakah Works?

The Diminishing Musharaka based on the above concept has taken different shapes in different transactions. Some examples are given below:

  • It has been used mostly in house financing. The client wants to purchase a house for which he does not have adequate funds. It approaches the financier who agrees to participate with him in purchasing the required house 20% of the price is paid by the client and 80% of the price by the financier. Thus, the financier owns 80% of the house while the client owns 20%. After purchasing the property jointly, the client uses the house for his residential requirement and pays rent to the financier for using his share in the property. At the same time, the share of financier is further divided in eight equal units, each unit representing 10% ownership of the house. The client promises to the financier that he will purchase one unit after three months. Accordingly months, he purchases one unit of the share of the financier by paying 1/10th of the price of the house. It reduces the share of the financier from 80% to 70%. Finance, the rent payable to the financier is also reduced to that extent. At the end of the second term, he purchases another unit increasing his share in the property to 40% and reducing the share of the financier to 60% and consequently reducing the rent to that proportion. This process goes on in the same fashion until after the end of two years, the client purchases the whole share of the financier reducing the share of the financier to 'zero' and increasing his own share to 100%
  • This arrangement allows the financier to claim rent according to his proportion of ownership in the property and at the same time allows him periodical return of a part of his principal through purchases of the units of his share.
  • 'A' wants to purchase a taxi to use it for offering transport services to passengers and to earn income through fares recovered from them, but he is short of funds. 'B' agrees to participate in the purchase of the taxi, therefore, both of them purchase a taxi jointly. 80% of the price is paid by 'B' and 20% is paid by A. After the taxi is purchased, it is employed to provide transport to the passengers whereby the net income of $1000/- is earned on daily basis. Since 'B' has 80% share in the taxi, it is agreed that 80% of the fare will be given to him and the rest of 20% will be retained by 'A' who has a 20% share in the taxi. It means that $800/- is earned by 'B' and $200/- by 'A' on daily basis. At the same time the share of 'B' is further divided into eight units. After three months 'A' purchases one unit from the share of 'B'. Consequently the share of 'B' is reduced to 70% and share of 'A' is increased, after the first term of three months increased to 30% meaning thereby that as from that date 'A' will be entitled to $300/- from the daily income of the taxi and 'B' will earn $700/-. This process will go on until after the expiry of two years, the whole taxi will be owned by 'A' and 'B' will take back his original investment along with income distributed to him as aforesaid.
  • 'A' wishes to start the business of ready-made garments but lacks the required funds for that business. 'B' agrees to participate with him for a specified period, say two years. 40% of the investment is contributed by 'A' and 60% by 'B'. Both start the business on the basis of Diminishing Musharakah. The proportion of profit allocated for each one of them is expressly agreed upon. But at the same time 'B's share in the business is divided to six equal units and 'A' keeps purchasing these units on gradual basis until after the end of two years 'B' comes out of the business, leaving its exclusive ownership to A. Apart from periodical profits earned by 'B', he gains the price of the units of his share which, in practical terms, tend to repay to him the original amount invested by him.


Types of Diminishing Musharakah:

Diminishing Musharakah in Shirkat-ul-Aaqd (Joint Venture)

FEATURES: Two partners start business in Shirkah to earn profit. One of the partners undertakes to purchase the share of another partner gradually, each month or each year.


RULES:

  • There will be an agreement of Shirkat-ul-Aqd 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. In this promise three conditions should be considered:

This promise will not be a part of Shirkah agreement. The price of unit will not be agreed in this promise but promise to purchase should be at market value at the time of purchasing. If promise is not fulfilled, then it can be forced by Court of law.

  • At the time of purchase, the price of unit will be decided on the basis of market value of business.
  • Unit will be purchased through Offer & Acceptance.

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 share holder undertakes to purchase the share of other gradually.


RULES:

  • 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 everyone will be owner of this asset as per ratio of his investment and all other rules of Shirkat-ul-Milk will be applicable
  • 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, Shriah Ahkaam relating to Ijarah will be applicable.
  • 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 tide-up with each other.

Diminishing for Islamic Mortgage (Halal House Financing for Muslim)

Diminishing Musharakah usually being used in House Financing for four purposes:

  • Purchase of House.
  • Construction of House.
  • Renovation of House.
  • Balance Transfer Facility (BTF).

Diminishing Musharakah for Purchase of House
  • Client in the approved area of the bank makes the choice of house.
  • Bank & client enter into Diminishing Musharakah agreement. In this agreement it is decided to purchase the house jointly and ratio of investment by each one.
  • The both partners will be owner of that 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.
  • Bank divides its own part of asset into units, which is promised by the client to purchase on pre-agreed price.
  • After taking possession of house, bank rent out its share to the client by execution of Ijarah Agreement.
  • Rent may be fixed on prevailing market rate or with mutual consent.
  • Bank’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.
  • Each unit will be purchased on the basis of Offer & Acceptance.

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:

  • Diminishing 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.
  • 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.
  • Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.
  • After completion of house, Ijarah Agreement will be signed and bank will give his 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.
  • Bank’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.
  • Each unit will be purchased on the basis of Offer & Acceptance.
  • Purchase of unit can be started after Diminishing Musharakah Agreement.

Financing only for Construction of House:

  • Valuation of plot will be made. This value will be investment of client in Musharakah Agreement and bank’s financing for construction will be investment of bank.
  • 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.
  • 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.
  • Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.
  • 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.
  • Rent may be fixed on prevailing market value or with mutual consent.
  • Bank’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.
  • Before one year, client cannot purchase bank’s units
  • Each unit will be purchased on the basis of Offer & Acceptance.

Diminishing Musharakah for Renovation of House
  • Valuation of house will be made and this value will be treated as investment of client in Diminishing Musharakah Agreement and renovation amount will be considered as bank’s investment.
  • Diminishing 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 will be responsible for renovation.
  • The both partners will be owner of the house 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.
  • Bank 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 bank will give his share of house on rent. Before completion of renovation, rent cannot be charged.
  • Rent may be fixed on prevailing market value or with mutual consent.
  • Bank’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.
  • Before one year, client cannot purchase bank’s units.
  • Each unit will be purchased on the basis of Offer & Acceptance.

Diminishing Musharakah for BTF
  • This product will be used only in those cases where someone have obtained interest-based loan for house.
  • Valuation of house will be made and this value will be treated as investment of client in Diminishing Musharakah Agreement and amount of loan paid by bank will be investment of bank.
  • Diminishing Musharakah Agreement will be signed between bank and client in which investment of everyone will be agreed.
  • 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.
  • Bank will divide its own part of asset into units, which is promised by the client to purchase on pre-agreed price.
  • Ijarah Agreement will be signed and bank will give his share of house on rent to the client.
  • Rent may be fixed on prevailing market value or with mutual consent.
  • Bank’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.
  • Before one year, client cannot purchase bank units.
  • Each unit will be purchase on the basis of Offer & Acceptance.

Note: This video lecture on Diminishing Musharakah is taken from Islamic finance courses online. These courses are taken from Islamic banking diploma and MBA Islamic finance program.

English: joint venture, profit and loss sharing

Alternate spelling: Musharaka

Definition: An investment partnership in which all partners are entitled to a share in the profits of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested. All partners to a Musharakah contribute funds and have the right to exercise executive powers in that project, similar to a conventional partnership structure and the holding of voting stock in a limited company.

This equity financing arrangement is widely regarded as the purest form of Islamic financing.

The two main forms of Musharakah are:

Permanent Musharakah: an Islamic bank participates in the equity of a project and receives a share of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period.

Diminishing Musharakah: this allows equity participation and sharing of profits on a pro rata basis, and provides a method through which the bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the bank’s share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the bank’s equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

News related to Musharakah (1,979)

Sharikah (Musharakah) and Modern Corporations

Tuesday, 09 Jan 2018 | Volume15.Issue02

Shariah Standard

Kesturi’s Sukuk Musharakah affirmed at ‘AA-IS’

Thursday, 04 Jan 2018 | Volume15.Issue02

Rating Updates

SP Setia’s Sukuk Musharakah due

Monday, 13 Nov 2017 | Volume14.Issue46

Deals

BGSM buys Sukuk Musharakah

Monday, 04 Sep 2017 | Volume14.Issue36

Deals

MARC affirms Cagamas’s Sukuk Musharakah

Tuesday, 23 May 2017 | Volume14.Issue21

Rating Updates

Cagamas’s Sukuk Musharakah ratings affirmed

Friday, 19 May 2017 | Volume14.Issue21

Rating Updates

Cagamas MBS’s Sukuk Musharakah reaffirmed

Wednesday, 25 Jan 2017 | Volume14.Issue05

Rating Updates

SCC upsizes Sukuk Musharakah program

Thursday, 12 Jan 2017 | Volume14.Issue03

Deals

MARC affirms Alpha Circle’s Sukuk Musharakah programs

Monday, 09 Jan 2017 | Volume14.Issue02

Rating Updates

Bumitama’s Sukuk Musharakah reaffirmed

Thursday, 05 Jan 2017 | Volume14.Issue02

Rating Updates

Recovery practices in Musharakah Mutanaqisah-based products

Wednesday, 23 Nov 2016 | Volume13.Issue47

Special Report

MARC affirms ANIH’s Sukuk Musharakah program

Thursday, 10 Nov 2016 | Volume13.Issue46

Rating Updates

Kesas’s Sukuk Musharakah reaffirmed

Friday, 07 Oct 2016 | Volume13.Issue41

Rating Updates

Shariah standard of Musharakah: Challenges posed to the industry and the reaction

Monday, 11 Jul 2016 | Volume13.Issue28

IFN Reports

IMIDRO plans Sukuk Musharakah

Friday, 24 Jun 2016 | Volume13.Issue26

Deals

MARC affirms PLUS’s Sukuk Musharakah rating

Thursday, 14 Apr 2016 | Volume13.Issue16

Rating Updates

PJH issues Sukuk Musharakah

Thursday, 14 Apr 2016 | Volume13.Issue16

Deals

Maybank Islamic to redeem Sukuk Musharakah

Friday, 18 Mar 2016 | Volume13.Issue12

Deals

Northport’s Sukuk Musharakah ratings affirmed

Monday, 25 Jan 2016 | Volume13.Issue04

Rating Updates

Is Musharakah Mutanaqisah a practical alternative to conventional home financing?

Wednesday, 30 Sep 2015 | Volume12.Issue39

Special Report

Largest Musharakah deal in Pakistan closed

Friday, 24 Jul 2015 | Volume12.Issue30

News Briefs

Inflation protected Sukuk Musharakah

Wednesday, 18 Mar 2015 | Volume12.Issue11

IFN Reports

Musharakah gaining popularity among Pakistani Islamic banking institutions

Wednesday, 21 Jan 2015 | Volume12.Issue03

IFN Reports

Musharakah gaining popularity among Pakistani Islamic banking institutions

Wednesday, 14 Jan 2015 | Volume12.Issue03

News Briefs

The unification of Musharakah contracts in the banking system of the Islamic Republic of Iran

Wednesday, 11 Jun 2014 | Volume11.Issue23

Special Report

The marvel and myth of Musharakah Mutanaqisah

Wednesday, 18 Dec 2013 | Volume10.Issue50

Special Report

SBI Islamic Fund (Brunei) closes Musharakah deal with leading Indonesian logistic company

Wednesday, 11 Dec 2013 | Volume10.Issue49

Case Study

Convertible Musharakah: An innovative structure for Shariah compliant investments

Wednesday, 04 Dec 2013 | Volume10.Issue48

IFN Reports

Bringing together Musharakah venture capital and alternative energy

Wednesday, 21 Aug 2013 | Volume10.Issue33

IFN Reports

Sukuk Musharakah in Iran: A bank-based or market-based instrument?

Wednesday, 24 Jul 2013 | Volume10.Issue29

IFN Reports

Musharakah structure brought forth

Thursday, 18 Apr 2013 | Volume10.Issue16

News Briefs

Musharakah affirmed

Monday, 04 Mar 2013 | Volume10.Issue09

Rating Updates

Sukuk Musharakah in the pipeline

Wednesday, 02 Jan 2013 | Volume10.Issue01

News Briefs

CIMB Islamic Bank’s RM300 million (US$97.52 million) junior Sukuk Musharakah

Wednesday, 03 Oct 2012 | Volume9.Issue39

Case Study

Maltese trust for Musharakah

Wednesday, 05 Sep 2012 | Volume9.Issue35

IFN Reports

First Resources’ US$192.47 million Sukuk Musharakah

Wednesday, 15 Aug 2012 | Volume9.Issue32

Case Study

Musharakah Mutanaqisah with a difference in Brunei

Wednesday, 04 Jul 2012 | Volume9.Issue26

IFN Reports

Maxis’ US$798.5 million Sukuk Musharakah

Wednesday, 18 Apr 2012 | Volume9.Issue15

Case Study

Esso Malaysia’s US$97.42 million Sukuk Musharakah

Wednesday, 28 Mar 2012 | Volume9.Issue12

Case Study

Sukuk Musharakah: An interesting instrument for the Iranian capital market

Wednesday, 18 Jan 2012 | Volume9.Issue02

IFN Reports

Satorp’s US$1 billion Sukuk Musharakah

Wednesday, 19 Oct 2011 | Volume8.Issue41

Case Study

Islamic microfinance securitization: Structuring a Sukuk Musharakah

Wednesday, 07 Sep 2011 | Volume8.Issue35

Features

Bernas Sukuk Musharakah

Wednesday, 03 Nov 2010 | Volume7.Issue44

Case Study

AmIslamic Bank Senior Sukuk Musharakah

Wednesday, 13 Oct 2010 | Volume7.Issue41

Case Study

Maju Expressway Musharakah Islamic Medium Term Notes

Wednesday, 04 Aug 2010 | Volume7.Issue31

Case Study

Draft on Musharakah

Wednesday, 07 Jul 2010 | Volume7.Issue27

News Briefs

Musharakah Mutanaqisah Financing Facilities Legal Issues and Challenges (Final Part)

Wednesday, 16 Jun 2010 | Volume7.Issue24

Features

Musharakah Mutanaqisah Financing Facilities Legal Issues and Challenges (Part I)

Wednesday, 09 Jun 2010 | Volume7.Issue23

Features

Musharakah Deal of the Year: Maybank Islamic’s Award Winning Musharakah Deal of 2009

Saturday, 01 May 2010 | Deals of the Year Handbook 2009

Features

Project Finance, Infrastructure & Malaysia Deal of the Year: Pengurusan Aset Air Berhad — Ijarah and Musharakah Program

Saturday, 01 May 2010 | Deals of the Year Handbook 2009

Features

Page 1 of 4012345...102030...»Last »

0 Replies to “Diminishing Musharakah Case Study”

Lascia un Commento

L'indirizzo email non verrà pubblicato. I campi obbligatori sono contrassegnati *