Presentation on theme: "Introduction to Diminishing Musharakah"— Presentation transcript:
1Introduction to Diminishing Musharakah Version 2.0Concept ofDiminishing MusharakahRelease Date:Jamad ul Thani 31, 1430 HJune 25, 2009Prepared By:Product Development and Shariah Compliance Department
2Presentation Outline Diminishing Musharakah - Introduction Basic StructureShariah PrinciplesIllustrationDM in trade & business
3Musharakah Musharakah is a form of partnership (Shirkat) There are two types of Shirkah:Shirkat-ul-MilkJoint ownership of two or more persons in a particular property2. Shirkat-ul-AqdA partnership affected by mutual contract. It can also be translated as a joint commercial enterprise
4Diminishing Musharakah In Diminishing Musharakah the financier and the client participate either in joint ownership ofa property or an equipment, or in a joint commercial enterpriseThe share of the financier will be divided into a number of unitsThe client will purchase these units one by one periodically until he is the sole owner of the property
5Diminishing Musharakah Three components of Diminishing MusharakaJoint ownership of the Bank and customerCustomer as a lessee uses the share of the bankRedemption of the share of the Bank by the customer
6Diminishing Musharakah Mode of Fixed Asset FinancingDiminishing Musharakah is commonly used for the purpose of financing of fixed assets by various Islamic banks.House financingCar FinancingPlant and machinery financingAll other fixed Assets
8Joint OwnershipMusharakaBANKCUSTOMERRentThe customer approaches the Bank with the request for Project/Machinery/House financingThe Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.Client promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to Purchase
9Gradual Transfer of Ownership Joint OwnershipMusharakaBANKCUSTOMERGradual Transfer of OwnershipClient promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to PurchaseCustomer pays rent for the use of banks share in the propertyClient purchases the units every month via a separate offer & acceptance every month and will eventually become the owner of the property.
10Gradual Transfer of Ownership Joint OwnershipMusharakaBANKCUSTOMERGradual Transfer of OwnershipOwnership of the asset is gradually transferred to the customer upon payment of asset price. (with the help of a Sale transaction between bank & customer at the end of each period)
12Shariah PrinciplesTo create joint ownership in property is called Shirkat-ul-Milk and is expressly allowed by all schools of Islamic Jurisprudence.All Muslim Jurists agree on the permissibility of the Financier leasing his share in property to client and charging him rent i.e. the permissibility of leasing one’s share to his partner.There is difference of opinion among leasing one’s share to a third part But there is no difference on permissibility on leasing to a partner.
13Shariah PrinciplesPromise of client to purchase units of share of financier is also allowed.The Transactions cannot be combined in a single arrangements and they have to be executed independently.This is because it is a well settled rule of Islamic Jurisprudence that one transaction cannot be made a condition for another.Instead of making the transactions a pre-condition for one another there can be one-sided promises from one party to another
15DM - IllustrationCustomer request financing for a fixed Asset costing Rs. 300 million.Islamic Bank agrees to provide financing up to 90% of the cost.Joint Ownership Agreement is executed between the bank and the Customer.Bank will purchase 90% share in the asset by paying Rs. 270 million to supplier.Customers pays its share of Rs. 30 million.
16DM - Illustration Bank’s share is divided into five units. Customer agrees to buyout Bank’s share (units) on yearly basis and the Undertaking is executed by the customer.Customer pays the rent for the usage of the Bank’s units .Rental reduces after purchase of each unit by the customer.After five years ownership of the asset is completely transferred to the customer.