Diminishing Musharakah
As a participatory mode with profit-and-loss sharing Musharakah is considered to be the most desired mode of Islamic financing. And Diminishing Musharakah is now being used extensively in many areas for financing fixed assets such as houses and motor cars. It is used mostly when one party who wants to own an asset cannot afford to pay the full price and takes the assistance of financing from another party which ends up with the complete ownership of the asset by the first party who purchase the share of the other party over a period of time while at the same time complying with the rules of the Shari’ah. When used in home financing, Diminishing Musharakah can be viewed as a form of shared ownership with a leasing sale-back arrangement, which makes it different from an interest-based mortgage.
DM arrangements allow equity participation and sharing of profits on a pro-rata basis, they also provide a method through which the bank keeps on reducing its equity in an asset against periodical payments, ultimately transferring ownership of the asset to the client.The procedure involved in Diminishing Musharakah is that the Islamic bank enters with a client into a partnership in which they both invest in the equity capital required to finance a project, and possibly also participate in the management; both share in the profits according to a pre-determined basis or in losses according to their investment. The bank would be also responsible for major maintenance, repair and insurance in respect of its share of a property. The client makes rental payments based on the level of equity held by the bank, with each payment, the bank’s equity reduces followed by a reduction in the rental calculated on the reducing equity. The client purchases the bank’s equity by the capital repayments, accordingly, its share is progressively increasing and the bank’s equity is diminishing until the bank has no equity and thus the client acquires complete ownership. Similarly, the rental payments keep reducing with the bank’s diminishing equity in the asset until no further rental payment has to be made.
A home financing transaction under DM involves the combined purchase of a house by the Islamic bank and the client and the bank’s leasing its share to the client. The transaction involves the creation of a joint ownership in the property and the rent of the Islamic bank’s share to the client for an agreed period of time. For example, the Bank may contribute 90% and the Buyer 10% of the purchase price. The client makes the promise to purchase the bank’s share and purchases the units at different stages. Over a period of up to 20 years, the client will make monthly purchase instalments through which the Bank will sell its share of the home to buyer. The bank leases out its share to the client for the use of the property with the option to buy it, the bank receiving agreed rental payments for the use of the property. Periodically, the client purchases a pre-agreed percentage of the bank’s share in the property, thereby increasing the client’s ownership in the property and reducing the bank’s share by a similar amount. The rental paid on the bank’s share is adjusted according to the bank’s diminishing share; and the transaction ends with the transfer of ultimate ownership of the entire property to the client upon successful completion of the lease term. if a client wishes to purchase the bank’s remaining share in the property prior to the agreed date, the Diminishing Musharakah agreement will be terminated upon payment.
DM arrangements allow equity participation and sharing of profits on a pro-rata basis, they also provide a method through which the bank keeps on reducing its equity in an asset against periodical payments, ultimately transferring ownership of the asset to the client.The procedure involved in Diminishing Musharakah is that the Islamic bank enters with a client into a partnership in which they both invest in the equity capital required to finance a project, and possibly also participate in the management; both share in the profits according to a pre-determined basis or in losses according to their investment. The bank would be also responsible for major maintenance, repair and insurance in respect of its share of a property. The client makes rental payments based on the level of equity held by the bank, with each payment, the bank’s equity reduces followed by a reduction in the rental calculated on the reducing equity. The client purchases the bank’s equity by the capital repayments, accordingly, its share is progressively increasing and the bank’s equity is diminishing until the bank has no equity and thus the client acquires complete ownership. Similarly, the rental payments keep reducing with the bank’s diminishing equity in the asset until no further rental payment has to be made.
A home financing transaction under DM involves the combined purchase of a house by the Islamic bank and the client and the bank’s leasing its share to the client. The transaction involves the creation of a joint ownership in the property and the rent of the Islamic bank’s share to the client for an agreed period of time. For example, the Bank may contribute 90% and the Buyer 10% of the purchase price. The client makes the promise to purchase the bank’s share and purchases the units at different stages. Over a period of up to 20 years, the client will make monthly purchase instalments through which the Bank will sell its share of the home to buyer. The bank leases out its share to the client for the use of the property with the option to buy it, the bank receiving agreed rental payments for the use of the property. Periodically, the client purchases a pre-agreed percentage of the bank’s share in the property, thereby increasing the client’s ownership in the property and reducing the bank’s share by a similar amount. The rental paid on the bank’s share is adjusted according to the bank’s diminishing share; and the transaction ends with the transfer of ultimate ownership of the entire property to the client upon successful completion of the lease term. if a client wishes to purchase the bank’s remaining share in the property prior to the agreed date, the Diminishing Musharakah agreement will be terminated upon payment.
