diminishing dm

7/31/2019 Diminishing DM

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DiminishingMusharakah (DM)


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Diminishing Musharakah (DM):

DM is a form of Musharakah where thefinancier and the client participate in a jointcommercial enterprise / property. In which,

all co-owner will have undivided ownership(undivided ownership: means that onepartner cannot claim a specific part of theproperty leaving remaining parts for other

partners) on a pro rata basis. Over certainperiod the equity of financier (divided intoequal value units), is purchased by theclient. And ultimately the client becomes

the sole owner of the enterprise.


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Procedure:1. Client request the bank for DM facility.

2. Islamic bank will carry out an appraisal, where a creditlimit will be assigned for client .

3. Islamic Bank releases its share to become partner in thebusiness or property. And a contract ofMusharakah will beexecuted b/w Islamic bank and client. [buying &selling

will not be stipulated]

4. Islamic bank and the client both will have undividedownership in the enterprise / property.

5. That means None of the parties can withdraw its equity tillthe DM is terminated.

6. All General rules of partnership apply


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Procedure:

7. Islamic Bank divides its own part of asset into equal units.

8. A separate (from Musharakah contract) uni-lateral

promise from client is obtained to purchase the units of

banks equity.

9. The price of share of equity is valued mutually or at market

value but not at face value

10. In case of property, Islamic bank rent out its share to the

client by execution of Ijarah Agreement.

11. This Ijarah Agreement can be signed before having the

asset in hand as allowed by Shariah Advisors Rents of

bank diminish with the equity.


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Procedure:

13. In case of commercial enterprise of business or services

profit and losses are shared.

14. Expenses connected to ownership are borne by the partnersproportionately

15. Equity of bank (divided into units of equal value), will be

purchased by the client periodically according to his promise.

16. This results in a decrease ofBanks share in the rent/profit andincrease clients share.

17. After last unit purchased by client, he becomes the sole owner of

the enterprise. [Banks share reduces to zero]


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At the beginning ofcontract

At the end of

contract


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Share in

capital

Share in

capital

1. The Project

Partner bank

3. Accruing Profits

2

Share

Of

profits

Share

Of

profits

4Sell its share in

CapitalPays the price of the

share purchased


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Shariah issues A lump sum amount of rent is necessary to be fixed for a certain period.

Also the different segments of time may have different rents.

Each unit will be purchased by client with a separate sale contract.

In financing for construction,/ renovation of housevaluation of plot/housewill be made. That will be consider as the share of client whilefinancing for construction/ renovation of house will be the share ofbank.

In case, where construction/ renovation is needed, before completion,rent cannot be charged.

Musharakah for BTF could be used only in those cases where someonehas obtained interest-based loan for house.


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Diminishing Musharakah (DM):Examples: (Simple case):

1. A client approached an Islamic Bank for construction of a School in F-8

Islamabad. He has an amount of Rs. 100,000 but the total cost isestimated as Rs. 500,000. How His request can be accommodated bythe bank?

Bank agrees to participate with client in building of school after anappraisal.

20% of the cost (Rs. 100,000) will be paid by the client and 80% ofthe cost (Rs. 400,000) by the bank. [Musharakah Contract is signed]

The client promises (unilateral promise) to the bank that

He will purchase one unit of the share after every two months &

He agrees (through agreement to Ijarah) to take the share of bankin the constructed property on rent

On completion, the bank owns 80% of the house while the clientowns 20%.

After completion, the client uses the building for running a Schooland pays rent to the Bank for using its share in the property. [Ijaracontract is signed]


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Sale (along with offer & acceptance) is executed at the time of sale ofeach share

After two months of construction completion, the share of Islamicbank will be divided in 20 equal units, each unit represents 5% ofbanks

ownership (Rs. 20,000) of the house. [sale contract is signed]

After the first two month, the client will purchas one unit of theshare of the bank by paying Rs. 20,000

It reduces the share of the bank from Rs. 400,000 to 380,000 andincreases the share of the client from Rs. 100,000 to 120,000.

Hence, the rent payable to the financier is also reduced to thatproportion [Rent being Rs. 5000 per month]


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At the end of the second two months, he will purchase another unitincreasing his share in the property and reducing the share of theIslamic bank as well as the rent also accordingly.

This process continues until after the end of 40 months, the client

becomes sole owner and equity of bank reduces to zero.


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Illustration

Total value of property =500,000 pkr

Share of client =100,000 pkrShare of Islamic Bank =400,000 pkr

No of units (U) =20 units

Value of one unit (V) =20,000 pkr

Rent per unit per month (r) =250 pkr

diminishing dm

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