Musharakah, Diminishing Musharakah, and Mudharabah

In the name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa rahmatullāhi wa-barakātuhu.

Musharakah, Diminishing Musharakah, and Mudharabah are all terms used for different types of contracts in Islamic finance. Here is a brief description of each:

Musharakah:

In Islamic finance, ‘Musharakah’ is a partnership arrangement in which profits and losses are shared. Musharakah plays a vital role in financing business operations based on Islamic principles. Musharakah is frequently used in the purchase of property, real estate, and in general to finance large purchases.

All providers of capital are entitled to participate in the management but not necessarily required to do so.  The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his contribution.

Diminishing Musharakah:

‘Diminishing Musharakah’ is a type of Musharakah (partnership) where one partner’s share is drawn down while it is transferred to another partner until the entire sum is passed over. Such a structure is common in home-buying where the lender (generally a bank) buys a property and receives payment from a buyer (via monthly rent payments) until the whole balance is paid off. The contract provides for a payment over and above the bank share in the profit for the equity of the project held by the bank.  

Mudharabah:

A Mudharabah contract is a profit-sharing partnership. One partner is a sleeping partner who provides money, and the other partner is an active partner who provides management and labour. 

In a Mudharabah contract, all expenses are paid from the profits, and then the remaining balance/profits are shared between the partners according to a pre-agreed ratio.

In the event of losses, the investor (sleeping partner) will bear the financial losses, while the active partner loses his invested time and effort. Changes may be made to the pre-agreed profit ratios through mutual agreement.

All three of these types of contracts can be Shariah compliant or ‘Islamic’ if the principals for their permissibility are followed. Diminishing Musharakah may be used to purchase a house, however a general ruling cannot be given. Each contract will have to be individually assessed and analysed to see if they fit the Shariah based criterion. 

For further advice on the matter, or questions on a particular contract, you may send us the contract details to be assessed. You may also refer to the following Muftis in the UK and seek their guidance.

• Mufti Faraaz Adam (Hafidhahullaah).
• Mufti Zameelur Rahman (Hafidhahullaah).
• Mufti Hanif Patel (Hafidhahullaah).
• Mufti Muadh Chati (Hafidhahullaah).

And Allah Ta ‘āla Knows Best

Bayazeed

Student – Darul Iftaa

UK

Checked and approved by,

Mufti Ebrahim Desai

12-04-1441 | 09-12-2019