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Diminishing Musharakah

In: Business and Management

Submitted By akshay91
Words 339
Pages 2
Musha rakah basically represents partnership whereby the partners share the profit according to agreed ratio/proportion, while the loss is to be shared in proportion to the capital invested by the partners. A form of musharakah that has been developed in the near past is Diminishing Musharakah. This concept broadly refers to diminishing partnership whereby a product/project becomes fully owned by a client. It is defined by some as a combination of sale and sharing contracts whereby the ownership is transferred through sale and this transfer is done through profit sharing arrangement.
A DM agreement is made up of three portions. The first one consists of musha¯rakah (partnership) between the customer and the bank. This is done through the contract of ’Shirkat-ul-milk meaning joint partnership over an asset. For example, the customer and the bank buy a house with initial capital investment equals 20 and 80 per cent by them, respectively. Second portion is implemented through the contract of ija¯ ra between the customer and bank. Here, the customer rents the house from the bank and pays the rental payment, which is shared between the two based on their percentage of shares. Finally, the customer will continue to buy the shares of the bank gradually until the house is fully owned by him. Slowly, the shares of the customer will increase while the shares of the bank will decrease, through the periodical repayment by the customer, until the house is fully owned by the customer. This is carried out through the sale contract (bay).
There are some conditions however to be respected for this mode of finance. Firstly, the agreement of joint purchase (musha¯ rakah), leasing (ijarah) and selling the financier’s shares in asset should not be combined in one single contract. Also whenever a sale or purchase of new shares takes place, there should be offer and…...

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