Diminishing Musharakah

Wa Alaykumus Salaam Wa Rahmatullahi Wa Barakaatuh.

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

Respected brother Muhammed Sayed,

Diminishing Musharakah is a form of musharakah, developed in the near past. According to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and an agreement is made that the client will purchase the units (of the share of the financier) one by one, periodically. This will increasing the client’s share of the commodity, until, eventually all the units of the financier are purchased by the client, making him the sole owner of the commodity.

This structure of Musharakah 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 desired 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 whilst 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 continues in the same manner. After 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 a periodical return of a part of his initial capital through purchases of the units of his share. [1]

In principle, this method of financing will be permissible if structured correctly and the principles of Shariah are strictly adhered to. 

The implementation of Diminishing Musharakah of each financier will have to be thoroughly audited in order to comment on the Sharia compliancy of that specific transaction.

And Allah Ta’ala Knows best 

Ebrahim Ibn Ahmed Dadan

Student Darul Iftaa
Pietermaritzburg South Africa

Checked and Approved by, 
Mufti Ebrahim Desai.