Diminishing Musharakah

The diminishing musharakah based on the above concept has taken different shapes in different transactions. Some examples are given below:

1. It has been used mostly in house financing. The client wants to purchase a house for which he does not have adequate funds. He approaches the financier who agrees to participate with him in purchasing the required house. 20% of the price is paid by the client and 80% of the price by the financier. Thus the financier owns 80% of the house while the client owns 20%. After purchasing the property jointly, the client uses the house for his residential requirement and pays rent to the financier for using his share in the property. At the same time the share of financier is further divided in eight equal units, each unit representing 10% ownership of the house. The client promises to the financier that he will purchase one unit after three months. Accordingly, after the first term of three months he purchases one unit of the share of the financier by paying 1/10th of the price of the house. It reduces the share of the financier from 80% to 70%. Hence, the rent payable to the financier is also reduced to that extent. At the end of the second term, he purchases another unit increasing his share in the property to 40% and reducing the share of the financier to 60% and consequentially reducing the rent to that proportion. This process goes on in the same fashion until after the end of two years, the client purchases the whole share of the financier reducing the share of the financier to ‘zero’ and increasing his own share to 100%.

This arrangement allows the financier to claim rent according to his proportion of ownership in the property and at the same time allows him periodical return of a part of his principal through purchases of the units of his share.

2. ‘A’ wants to purchase a taxi to use it for offering transport services to passengers and to earn income through fares recovered from them, but he is short of funds. ‘B’ agrees to participate in the purchase of the taxi, therefore, both of them purchase a taxi jointly. 80% of the price is paid by ‘B’ and 20% is paid by ‘A’. After the taxi is purchased, it is employed to provide transport to the passengers whereby the net income of Rs. 1000/- is earned on daily basis. Since ‘B’ has 80% share in the taxi it is agreed that 80% of the fare will be given to him and the rest of 20% will be retained by ‘A’ who has a 20% share in the taxi. It means that Rs. 800/- is earned by ‘B’ and Rs. 200/- by ‘A’ on daily basis. At the same time the share of ‘B’ is further divided into eight units. After three months ‘A’ purchases one unit from the share of ‘B’. Consequently the share of ‘B’ is reduced to 70% and share of ‘A’ is increased to 30% meaning thereby that as from that date ‘A’ will be entitled to Rs. 300/- from the daily income of the taxi and ‘B’ will earn Rs. 700/-. This process will go on until after the expiry of two years, the whole taxi will be owned by ‘A’ and ‘B’ will take back his original investment along with income distributed to him as aforesaid.

3. ‘A’ wishes to start the business of ready-made garments but lacks the required funds for that business. ‘B’ agrees to participate with him for a specified period, say two years. 40% of the investment is contributed by ‘A’ and 60% by ‘B’. Both start the business on the basis of musharakah. The proportion of profit allocated for each one of them is expressly agreed upon. But at the same time ‘B’s share in the business is divided to six equal units and ‘A’ keeps purchasing these units on gradual basis until after the end of two years ‘B’ comes out of the business, leaving its exclusive ownership to ‘A’. Apart from periodical profits earned by ‘B’, he gains the price of the units of his share which, in practical terms, tend to repay to him the original amount invested by him.

Source: Mufti Muhammad Taqi Usmani, An Introduction to Islamic Finance. Republished with permission.