Diminishing Musharakah in Trade

The third example of diminishing musharakah as given above is that the financier contributes 60% of the capital for launching a business of ready-made garments, for example. This arrangement is composed of two ingredients only:

1) In the first place, the arrangement is simply a musharakah whereby two partners invest different amounts of capital in a joint enterprise. This is obviously permissible subject to the conditions of musharakah already spelled out earlier in this chapter.

2) Purchase of different units of the share of the financier by the client. This may be in the form of a separate and independent promise by the client. The requirements of Shariah regarding this promise are the same as explained in the case of House financing with one very important difference. Here the price of units of the financier cannot be fixed in the promise to purchase, because if the price is fixed before hand at the time of entering into musharakah, it will practically mean that the client has ensured the principal invested by the financier with or without profit, which is strictly prohibited in the case of musharakah. Therefore, there are two options for the financier about fixing the price of his units to be purchased by the client. One option is that he agrees to sell the units on the basis of valuation of the business at the time of the purchase of each unit. If the value of the business has increased, the price will be higher and if it has decreased the price will be less. Such valuation may be carried out in accordance with the recognized principles through the experts, whose identity may be agreed upon between the parties when the promise is signed. The second option is that the financier allows the client to sell these units to anybody else at whatever price he can, but at the same time he offers a specific price to the client, meaning thereby that if he finds a purchaser of that unit at a higher price, he may sell it to him, but if he wants to sell it to the financier, the latter will be agreeable to purchase it at the price fixed by him before hand.

Although both these options are available according to the principles of Shariah, the second option does not seem to be feasible for the financier, because it would lead to injecting new partners in the musharakah which will disturb the whole arrangement and defeat the purpose of diminishing musharakah in which the financier wants to get his money back within a specified period. Therefore, in order to implement the objective of diminishing musharakah, only the first option is practical.

Source: Republished with the kind permission of Sheikh Muhammad Taqi Usmani.