Two Days Specialized Training Workshop On Islamic Microfinance 16th & 17th September, 2012 Sanaa, Yemen

DIMINISHING MUSHARAKHA
Abdul Samad
AlHuda CIBE

Diminishing Musharakah
Diminishing Musharakah (DM is a type of Shirkah where one partner purchases the other partners share gradually

IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)

FEATURES OF DIMINISHING MUSHARAKAH

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.

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.

2.

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)
3.

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.

4.

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)
5.

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.

6.

7.

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.

The property will be in the name of the client.

This is Shirkat-ul-Milk.

5.

6.

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

Features of Diminishing Musharakah for Purchase of House

8.

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.
IMFIs monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

9.

10.

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.

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.

3.

Financing for Purchase of Plot & Construction

5.

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

6.

Financing for Purchase of Plot & Construction

7.

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.

8.

9.

IMFIs 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.

Each unit will be purchased on the basis of Offer & Acceptance.

Purchase of unit can be started after Musharakah Agreement.

12.

Financing Only for Construction Of House

1.

Valuation of plot will be made. This value will be investment of client in Musharakah Agreement and IMFIs financing for construction will be investment of IMFI.

2.

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.

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.

5.

6.

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.

IMFIs 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.

Before one year, client cannot purchase IMFIs units.

13.

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 IMFIs 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.

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.

9.

Features for Diminishing Musharakah for Renovation of House

10.

Rent may be fixed on prevailing market value or with mutual consent.

IMFIs monthly profit may also be decided, as monthly rent of the house and principal amount will be recovered in the unit price.

11.

Features for Diminishing Musharakah for Renovation of House

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.
Before one year, client cannot purchase IMFIs units.

13.

14.

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.

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