Ideology of Ownership & Wealth in Islam Role & Importance of Diminishing Musharaka in modern Islamic fiscal system

Authors

  • Muhammad Yahya Asim

Abstract

Islamic banking system has many modes of financing in which the Concept of Diminishing Musharaka is very important and viable option to finance, in this article I tried to explore the concept of the product and it's usage in current Islamic banking system. The Concept of Diminishing Musharaka is as follows : 

 Diminishing Musharakah is a form of partnership, which ends with the complete ownership of a partner who purchases the share of another partner in that project by a redeeming mechanism agreed between both of them. Diminishing Musharakah is used mostly when one party who wants to own an asset or a commercial business which does not have adequate funds to pay the full price; and takes the assistance of financing from another party. The share of the financier is divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by the client so as to make him the sole owner of the asset. In this kind of partnership, all partners are co-owners of each and every part of the joint property or asset on a pro-rata basis and one partner cannot make a claim to a specific part of the property or asset leaving the other parts for other partners. 

Diminishing Musharakah can be conducted through shirkah al-aqd; in that case, the ratio of profit distribution for each partner can be disproportionate to the ratio of equity of both parties and has to be stipulated at the time of execution of the contract. In case of loss, it should be necessarily allocated in accordance with the ratio of equity at the time when the loss was incurred. The lessee partner can promise to buy periodically the share of the financer partner according to the market value or at a price to be agreed at the time of the sale. The price of share units cannot be fixed in the promise to sell.

Diminishing Musharakah can also be conducted through shirkah al-milk, the ratio of profit distribution doesn’t need to be stipulated in the arrangement. Each partner will own the risk as well as the reward in proportionate to their individual share in the property or asset. The financing partner can lease its share to the other party and receive a rental for use of the leased part. The other party goes on paying the rental and purchasing the share of the financier partner in the form of ownership units, the rental payments will go on decreasing. He will also get the benefit of having the use of his part without paying any rent. One partner cannot purchase the ownership units representing the share of the co-partner at a pre-agreed price the product can be used for purchase of House, construction and renovation alongside it could be used for purchase of vehicle,  machinery and plant as well.

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Published

2021-06-09

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Articles