Diminishing Musharakah - Center of Islamic Finance

Report
Center of Islamic Finance
COMSATS Institute of Information Technology
Lahore Campus
Adopted from open source lecture of
Meezan Bank.
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Musharakah is a form of partnership (Shirkat)
There are two types of Shirkah:
1. Shirkat-ul-Milk
Joint ownership of two or more persons in a particular
property.
2.
Shirkat-ul-Aqd
A partnership affected by mutual contract. It can also
be translated as a joint commercial enterprise.
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
In Diminishing Musharakah the financier and the client
participate either in joint ownership of a property or an
equipment, or in a joint commercial enterprise.

The share of the financier will be divided into a number
of units.

The client will purchase these units one by one
periodically until he is the sole owner of the property.
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Three components of Diminishing Musharaka
1. Joint ownership of the Bank and customer.
2. Customer as a lessee uses the share of the bank.
3. Redemption of the share of the Bank by the
customer.
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Mode of Fixed Asset Financing.
Diminishing Musharakah is commonly used for the
purpose of financing of fixed assets by various Islamic
banks.
• House financing
• Car Financing
• Plant and machinery financing
• All other fixed Assets
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Basic Structure
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BANK
Joint
Ownership
Rent
CUSTOMER
Musharaka
The customer approaches the Bank with the request for
Project/Machinery/House financing.
 The Bank enters into a Musharakah (Joint Ownership)
agreement with the customer and both of them pay their
respective shares to the seller of the asset.
 Client promises to purchase Bank’s share (units) over
the tenure of transaction with the help of Undertaking to
Purchase

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BANK
Joint
Ownership
Gradual Transfer of Ownership
CUSTOMER
Musharaka



Client promises to purchase Bank’s share (units) over
the tenure of transaction with the help of Undertaking to
Purchase.
Customer pays rent for the use of banks share in the
property.
Client purchases the units every month via a separate
offer & acceptance every month and will eventually
become the owner of the property.
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BANK
Joint
Ownership
Gradual Transfer of Ownership
CUSTOMER
Musharaka

Ownership of the asset is gradually transferred to the
customer upon payment of asset price. (with the help of
a Sale transaction between bank & customer at the end
of each period)
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Shariah Principles
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
To create joint ownership in property is called Shirkat-ulMilk and is expressly allowed by all schools of Islamic
Jurisprudence.

All Muslim Jurists agree on the permissibility of the
Financier leasing his share in property to client and
charging him rent i.e. the permissibility of leasing one’s
share to his partner.

There is difference of opinion among leasing one’s share
to a third part But there is no difference on permissibility
on leasing to a partner.
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
Promise of client to purchase units of share of financier
is also allowed.

The Transactions cannot be combined in a single
arrangements and they have to be executed
independently.

This is because it is a well settled rule of Islamic
Jurisprudence that one transaction cannot be made a
condition for another.

Instead of making the transactions a pre-condition for
one another there can be one-sided promises from one
party to another
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Illustration
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1.
Customer request financing for a fixed Asset costing Rs.
300 million.
2.
Islamic Bank agrees to provide financing up to 90% of
the cost.
3.
Joint Ownership Agreement is executed between the
bank and the Customer.
4.
Bank will purchase 90% share in the asset by paying
Rs. 270 million to supplier.
5.
Customers pays its share of Rs. 30 million.
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6.
7.
8.
Bank’s share is divided into five units.
Customer agrees to buyout Bank’s share (units) on
yearly basis and the Undertaking is executed by the
customer.
Customer pays the rent for the usage of the Bank’s
units .
9.
Rental reduces after purchase of each unit by the
customer.
10.
After five years ownership of the asset is completely
transferred to the customer.
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THANK YOU
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