DIMINISHING MUSHARAKHA

DIMINISHING DIMINISHING MUSHARAKHA MUSHARAKHA

Abdul SamadAbdul SamadAlHuda CIBEAlHuda CIBE

Two Days Specialized Training Workshop On

Islamic Microfinance

16th & 17th September, 2012 Sana’a, Yemen

Diminishing MusharakahDiminishing Musharakah

Diminishing Musharakah Diminishing Musharakah

(DM(DM is a type of Shirkah where is a type of Shirkah where one partner purchases the other one partner purchases the other partner’s share graduallypartner’s share gradually

FEATURES OF DIMINISHING FEATURES OF DIMINISHING MUSHARAKAHMUSHARAKAH

IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)

Two partners purchase any asset Two partners purchase any asset (machinery/property) and (machinery/property) and their their intention is that one or both intention is that one or both partners will use this asset or partners will use this asset or they rent out their sharethey rent out their share and one and one Shareek undertakes to purchase the Shareek undertakes to purchase the share of other gradually.share of other gradually.

Rules of Diminishing Rules of Diminishing MusharakahMusharakah

in Shirkat-ul-Milk (Joint in Shirkat-ul-Milk (Joint Ownership)Ownership)

1.1. There will be an agreement of Shirkat ul There will be an agreement of Shirkat ul Milk and it will be decided How much Milk and it will be decided How much investment will be made by each partner?investment will be made by each partner?

2.2. Asset will be purchased and all partners Asset will be purchased and all partners will be owner of this asset as per ratio of will be owner of this asset as per ratio of his investment and all other rules of his investment and all other rules of Shirkat-ul-Milk will be applicable.Shirkat-ul-Milk will be applicable.



3.3. One Shareek can rent out his share to One Shareek can rent out his share to other partner or to a third party and other partner or to a third party and Ijarah Agreement will be signed.Ijarah Agreement will be signed.

4.4. Within period of Ijarah, Within period of Ijarah, Shariah Shariah AhkaamAhkaam relating to Ijarah will be relating to Ijarah will be applicable.applicable.



5.5. One of the partners can promise to One of the partners can promise to purchase the share of another partner .purchase the share of another partner .

6.6. Unit can be purchased on the basis of Unit can be purchased on the basis of Offer & Acceptance.Offer & Acceptance.

7.7. All the above-mentioned agreements and All the above-mentioned agreements and undertaking should be independent and undertaking should be independent and not tide-up with each other.not tide-up with each other.

Uses of Diminishing of Uses of Diminishing of Musharakah in IMFI SystemMusharakah in IMFI System

Diminishing Musharakah usually Diminishing Musharakah usually being used in being used in House FinancingHouse Financing for for these purposes:these purposes:

Purchase of House Construction of House Renovation of House

Features of Diminishing Features of Diminishing Musharakah for Purchase of Musharakah for Purchase of

HouseHouse

1.1. The Client in The Client in the approved the approved area of the area of the IMFI makes IMFI makes the choice of the choice of house.house.


HouseHouse2.2. IMFI & client enter into IMFI & client enter into

Musharakah Musharakah agreement. In this agreement. In this agreement it is agreement it is decided to purchase decided to purchase the house jointly and the house jointly and ratio of investment by ratio of investment by each one.each one.


HouseHouse4.4. The property will be in the name of The property will be in the name of

the client.the client.

5.5. This is Shirkat-ul-Milk.This is Shirkat-ul-Milk.

6.6. According to the ratio of ownership, According to the ratio of ownership, each one is responsible for the loss.each one is responsible for the loss.


HouseHouse8.8. After taking possession of house, IMFI After taking possession of house, IMFI

rent out its share to the client by rent out its share to the client by execution of Ijarah Agreement.execution of Ijarah Agreement.

9.9. Rent may be fixed on prevailing market Rent may be fixed on prevailing market rate or with mutual consent. rate or with mutual consent.

10.10. IMFI’s monthly profit may also be IMFI’s monthly profit may also be decided, as monthly rent of the house decided, as monthly rent of the house and principal amount will be recovered in and principal amount will be recovered in the unit price.the unit price.


HouseHouse11.11. In Ijarah Agreement, a lump In Ijarah Agreement, a lump

sum amount of rent is necessarysum amount of rent is necessary

to be fixed for a certain period. to be fixed for a certain period.

Rent for the rest of the period, Rent for the rest of the period,

may be linked with agreed may be linked with agreed Benchmark.Benchmark.

12.12. Each unit will be purchased on Each unit will be purchased on the basis of Offer & Acceptancethe basis of Offer & Acceptance..


HouseHouse7. 7. IMFI divides its own IMFI divides its own

part of asset into part of asset into units, which is units, which is promised by the promised by the client to purchase on client to purchase on pre-agreed pricepre-agreed price..

Features of Diminishing Features of Diminishing Musharakah for Construction of Musharakah for Construction of

HouseHouse

There are two scenarios:There are two scenarios:

Financing for Purchase of Plot & Financing for Purchase of Plot & Construction.Construction.

Financing only for Construction.Financing only for Construction.

Financing for Purchase of Financing for Purchase of Plot & ConstructionPlot & Construction

1.1. Musharakah Agreement will be Musharakah Agreement will be signed between IMFI and client in signed between IMFI and client in which investment of everyone will which investment of everyone will be agreed. It will also be agreed be agreed. It will also be agreed that client as working partner will that client as working partner will be responsible for construction.be responsible for construction.

Features for Diminishing Features for Diminishing Musharakah for Construction of Musharakah for Construction of

HouseHouse

2.2. Both partners will be Both partners will be co-owner of the property in co-owner of the property in same ratio as ratio of same ratio as ratio of investment.investment.

3.3. The property will be in the name of the The property will be in the name of the client and mortgaged with the IMFI.client and mortgaged with the IMFI.

• This is Shirkat-ul-Milk.This is Shirkat-ul-Milk.


5.5. According to the ratio of ownership, each According to the ratio of ownership, each one is responsible for the loss.one is responsible for the loss.

6.6. IMFI will divide its own IMFI will divide its own

part of asset into units, part of asset into units,

which is promised by the which is promised by the

client to purchase on client to purchase on

pre-agreed pricepre-agreed price


7.7. After completion of house, Ijarah Agreement will After completion of house, Ijarah Agreement will be signed and IMFI will give its share of house be signed and IMFI will give its share of house on rent to the client. Before completion of on rent to the client. Before completion of construction, rent cannot be charged.construction, rent cannot be charged.

8.8. Rent may be fixed on prevailing market value or Rent may be fixed on prevailing market value or with mutual consent.with mutual consent.

9.9. IMFI’s monthly profit may also be decided, as IMFI’s monthly profit may also be decided, as monthly rent of the house and principal amount monthly rent of the house and principal amount will be recovered in the unit price.will be recovered in the unit price.


10.10. In Ijarah Agreement, a In Ijarah Agreement, a lump sum amount of lump sum amount of rent is necessary to be rent is necessary to be fixed for a certain fixed for a certain period. Rent for the rest period. Rent for the rest of the period, may be of the period, may be linked with agreed linked with agreed Benchmark.Benchmark.


11.11. Each unit will be Each unit will be purchased on the purchased on the basis of Offer & basis of Offer & Acceptance.Acceptance.

12.12. Purchase of unit Purchase of unit can be started can be started after Musharakah after Musharakah Agreement.Agreement.

Financing Only for Financing Only for Construction Of HouseConstruction Of House

1.1. Valuation of plot will be made. This value will be Valuation of plot will be made. This value will be investment of client in Musharakah Agreement investment of client in Musharakah Agreement and IMFI’s financing for construction will be and IMFI’s financing for construction will be investment of IMFI.investment of IMFI.

2.2. Musharakah Agreement will be signed between Musharakah Agreement will be signed between IMFI and client in which investment of everyone IMFI and client in which investment of everyone will be agreed. It will also be agreed that client will be agreed. It will also be agreed that client as working partner will be responsible for as working partner will be responsible for construction.construction.


3.3. The both partners will be owner of the The both partners will be owner of the property in same ratio as ratio of property in same ratio as ratio of investment.investment.

The property will be in the The property will be in the name of the client.name of the client.


6.6. According to the ratio of ownership, each According to the ratio of ownership, each one is responsible for the loss.one is responsible for the loss.


7.7. IMFI will divide its IMFI will divide its own part of asset own part of asset into units, which is into units, which is promised by the promised by the client to purchase client to purchase on pre-agreed on pre-agreed price.price.


8.8. After completion of After completion of house, Ijarah Agreement house, Ijarah Agreement will be signed and IMFI will be signed and IMFI will give his share of will give his share of house on rent. Before house on rent. Before completion of completion of construction, rent cannot construction, rent cannot be charged.be charged.

9.9. Rent may be fixed on Rent may be fixed on prevailing market value prevailing market value or with mutual consentor with mutual consent..


10.10. IMFI’s monthly profit may also be decided, IMFI’s monthly profit may also be decided, as monthly rent of the house and principal as monthly rent of the house and principal amount will be recovered in the unit price.amount will be recovered in the unit price.

In Ijarah Agreement, a lump sum amount of In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a certain rent is necessary to be fixed for a certain period. Rent for the rest of the period, may period. Rent for the rest of the period, may be linked with agreed Benchmark.be linked with agreed Benchmark.


12.12. Before one year, client cannot Before one year, client cannot purchase IMFI’s units.purchase IMFI’s units.

13.13. Each unit will be purchased on the Each unit will be purchased on the basis of Offer & Acceptance. basis of Offer & Acceptance.

Features for Diminishing Features for Diminishing MusharakahMusharakah

for Renovation of Housefor Renovation of House

1.1. Valuation of house will be made and Valuation of house will be made and this value will be treated as this value will be treated as investment of client in investment of client in

MusharakahMusharakah Agreement and Agreement and renovation amount will be renovation amount will be considered as IMFI’s investment.considered as IMFI’s investment.

Features for Diminishing MusharakahFeatures for Diminishing Musharakahfor Renovation of Housefor Renovation of House

2.2. Musharakha Agreement will be signed Musharakha Agreement will be signed between IMFI and client in which between IMFI and client in which investment of everyone will be agreed. investment of everyone will be agreed. It will also be agreed that client as It will also be agreed that client as working will be responsible for working will be responsible for renovation.renovation.

3.3. The both partners will be owner of the The both partners will be owner of the house in same ratio as ratio of house in same ratio as ratio of investment.investment.


4.4. The property will be in the name of The property will be in the name of the client.the client.


6.6. According to the ratio of ownership, According to the ratio of ownership, each one is responsible for the loss. each one is responsible for the loss.

7.7. IMFI will divide its own part of asset IMFI will divide its own part of asset into units, which is promised by the into units, which is promised by the client to purchase on pre-agreed client to purchase on pre-agreed price.price.


8.8. IMFI will divide its own part of asset into IMFI will divide its own part of asset into units, which is promised by the client to units, which is promised by the client to purchase on pre-agreed price.purchase on pre-agreed price.

9.9. After completion of renovation, Ijarah After completion of renovation, Ijarah Agreement will be signed and IMFI will Agreement will be signed and IMFI will give his share of house on rent. Before give his share of house on rent. Before completion of renovation, rent cannot be completion of renovation, rent cannot be chargedcharged..


10.10. Rent may be fixed on prevailing Rent may be fixed on prevailing market value or with mutual market value or with mutual consent.consent.

11.11. IMFI’s monthly profit may also be IMFI’s monthly profit may also be decided, as monthly rent of the decided, as monthly rent of the house and principal amount will be house and principal amount will be recovered in the unit price.recovered in the unit price.


12.12. In Ijarah Agreement, a lump sum amount In Ijarah Agreement, a lump sum amount of rent is necessary to be fixed for a of rent is necessary to be fixed for a certain period. Rent for the rest of the certain period. Rent for the rest of the period, may be linked with agreed period, may be linked with agreed Benchmark. Benchmark.

13.13. Before one year, client cannot purchase Before one year, client cannot purchase IMFI’s units.IMFI’s units.

14.14. Each unit will be purchased on the basis Each unit will be purchased on the basis of Offer & Acceptance.of Offer & Acceptance.

Procedure of DMProcedure of DM

D M Agreement D M Agreement (IMFI +Client)(IMFI +Client)

Undertaking to Ijarah Undertaking to Ijarah (from the client)(from the client)

Sale Agreement Sale Agreement (Client + owner of the house)(Client + owner of the house)

Payment of Purchase Price Payment of Purchase Price (to the client)(to the client)

Lease Agreement Lease Agreement (IMFI + client)(IMFI + client)

Procedure of Sale and Lease Procedure of Sale and Lease BackBack

D M Agreement D M Agreement (IMFI +Client) (IMFI +Client)

Undertaking to Ijarah Undertaking to Ijarah (from the client)(from the client)

Sale Agreement Sale Agreement (IMFI + client)(IMFI + client)

Payment of Purchase Price Payment of Purchase Price (to the client)(to the client)

Lease Agreement Lease Agreement (IMFI + client)(IMFI + client)

Value of Units at Face Value of Units at Face ValueValue

IssueIssue

In case of Diminishing In case of Diminishing Musharakah IMFI agrees Musharakah IMFI agrees to sell the units to the to sell the units to the client at face value. client at face value.

SolutionSolution

It is preferred that in all It is preferred that in all such transactions such transactions valiuation should be valiuation should be done either on market done either on market value or any value value or any value agreed at the time of agreed at the time of sale of unit.sale of unit.

Covering Risks Under Covering Risks Under Takaful Takaful

IssueIssue

In DM risks of the leased In DM risks of the leased assets should be covered assets should be covered under Takaful under Takaful arrangement rather than arrangement rather than under conventional under conventional insurance policies. insurance policies.

SolutionSolution

As an islamic financial As an islamic financial Institution, the IMFI Institution, the IMFI should obtain Takaful for should obtain Takaful for its assets under DM.its assets under DM.

Proportionate TakafulProportionate Takaful

IssueIssue

Incase of combined Incase of combined ownership model, ownership model, customer solely pays the customer solely pays the cost of Takaful. cost of Takaful.

SolutionSolution

Takaful cost should be Takaful cost should be borne by the partners in borne by the partners in proportionate to their proportionate to their interest in the asset and interest in the asset and not be solely borne by not be solely borne by the customer. the customer.

Repair & MaintenanceRepair & Maintenance

IssueIssue

In certain cases repair In certain cases repair and maintenance cost is and maintenance cost is borne by the customer. borne by the customer.

SolutionSolution

The IMFI should pay the The IMFI should pay the charges of maintenance charges of maintenance as per his shire in DM as per his shire in DM assts.assts.

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Documents

DIMINISHING MUSHARAKHA