1. DIMINISHING
MUSHARAKA
Ch Hamad Rasool Bhullar
AlHuda – CIBE Trainings – Nov 29, 2011

2. Diminishing Musharakah-
Concept
Based on Shirkat-ul-Milk (joint ownership)
“ the combination of assets of two or more persons
in a manner that creates a state of sharing in the
realized profit or income or benefiting from an
increase in the value of the partnership assets. This
combination of assets for making profit
necessitates losses, if any. This partnership is
created by the wish of the partners such as when
two or more parties acquire common shares in a
particular asset.”

3. Diminishing Musharaka -
Explained
 A diminishing musharaka is a partnership
between an IFI and customer who participate in
joint ownership of property or Asset
 Share in ownership of IFI is divided into parts
with the understanding that the customer will
gradually purchase that share via periodic
payments.
 The objective is for the customer to become
the sole owner of the property or enterprise
eventually

4. Diminishing Musharaka – Explained
 Throughout the financing period, the IFI, as joint
owner, must share risks and liabilities associated with
ownership
 Therefore, the IFI’s share in the equity declines each
Period through partial return of capital. The financier
receives periodic profits based on its reduced equity
share that remains invested during the period.
 The share of the client in the capital steadily increases
over time, ultimately resulting in complete ownership
of the venture. The profit share of the client goes to
the MFI as a repayment of the equity.

5. Areas of Applications
 The housing sector has witnessed greater use of
diminishing musharaka than any other sector,
since the expected profits from this business
would be sourced from rentals that are
predictable to a considerable degree.
 It is also observed to be quite promising in the
field of microfinance or financing of small and
medium enterprises.
 Purchase of a Farm House with constructed
 Construction of a

6. The Transaction and its Flow over Time
The Process of the deal
Islamic FI Client
Jointly
Own and buy
Asset
Client Pays Buys through Monthly Payments = Islamic IFI Receives
Rental + Ownership Units
Asset becomes the Ownership of Client

7. DM for MFIs
Agreements and Contracts
 Diminishing Musharakah Agreement
 Ijarah (Rental) Agreement
 Agreement To Purchase
 With the standard documents on unit transfer
as purchased from time to time

8. The steps involved in
Transaction
1. Customer request an IFI for an Asset
Investment.
2. IFI agrees to provide financing based on
Criteria.
3. Joint Ownership Agreement is executed
between the IFI and the Customer.
4. IFI will purchase its agreed share in the
property by paying to the supplier.
5. Customers pays his/her share to supplier.

9. The steps involved in
Transaction
6. IFI’s share is divided into agreed number of units.
7. Customer agrees to buy IFI’s share (units) on a
monthly basis and the Undertaking is executed by
the customer.
8. Customer pays the rent for the usage of the IFI’s
units.
9. Rental reduces after purchase of each unit by the
customer.
10. After purchase of all units ownership of the asset is
completely transferred to the customer.

10. Other Features of DM
 Joint ownership with the client
 Sharing the profits and losses
 Parties are Responsible (as a co-owners) for any
damage to the structure of the house/property
 Eligibility criteria, financing limits and profit rates may
vary based on assessment and location(s)
 Flexible in Payments as agreed between the parties
 Rental Charged when the client gets legal possession
of the property

11. Risk Areas
Default Risk
Asset Risk
• Destruction of Asset
• Death of Client
Legal Issues – Legal Rights of Heirs in case
of untimely death
– Testing of Documentation in Courts
Delayed Payments
Clients Friendly and flexible

12. Many Thanks
For listening with Patience
Any Questions are welcomed
hamadrb@gmail.com
