diminishing musharakah presentation 02-06-08

8/8/2019 Diminishing Musharakah Presentation 02-06-08

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Diminishing Musharakah

By

Mahmood ShafqatSenior Joint DirectorIslamic Banking Department

State Bank of PakistanJune 02, 2008

The views expressed in this

presentation are those of the author

and do not necessarily represent StateBank of Pakistan


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Presentation Outline

Diminishing Musharakah - Introduction

Basic Structure

Shariah Principles Illustration


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Diminishing Musharakah-Introduction


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Shirkah means Sharing in theterminology of Islamic Fiqh.

Musharakah is basically a kind ofpartnership in which the partners jointogether with their contributions for the

common objective of undertakingbusiness and trade in accordance withthe principles of Shariah.

Musharakah


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It has been divided into two kinds:

SHIRKAT-UL-MILKIt means joint ownership of two or more personsin a particular property.

SHIRKAT-UL-AQD

Which means a partnership effected by amutual contract.

Types of Shirkat


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y Based on Shirkat-ul-Milk

Means joint ownership in a property

y Three components

Joint ownership of the Bank and customer

Customer as a lessee uses the share of

the bankRedemption of the share of the Bank by

the customer

Diminishing Musharakah


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Diminishing Musharakah is commonlyused for the purpose of financing offixed assets by various Islamic banks.

y House financingy Car Financingy Plant and machinery financingy Factory/Building financingy Agriculture land financingy All other fixed Assets

Mode of Fixed Asset Financing


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Basic Transaction Structure


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CUSTOMER

The Bank enters into a Musharakah (Joint Ownership)agreement with the customer and both of them pay theirrespective shares to the seller of the asset.

Customer pays rent for the use of banks share in theproperty

The customer approaches the Bank with the requestfor Project/Machinery/House financing

BANK

Joint

Ownership

Musharaka

Rent


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CUSTOMER

The Bank enters into a Musharakah (Joint Ownership)agreement with the customer and both of them pay theirrespective shares to the seller of the asset.

Ownership of the asset is gradually transferred to thecustomer upon payment of asset price.

Customer pays rent for the use of banks share in theproperty

BANK

Joint

Ownership

Musharaka

Gradual Transfer ofOwnership

The customer approaches the Bank with the request forProject/Machinery financing


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The value of Banks share in Musharakah property is dividedinto units, which it sells to the customer. Units will beworked out by dividing Banks financed amount by numberof months for which finance to be allowed.

With each purchase of unit by the customer, the Banksshare in the Musharakah property starts diminishing,

whereas customers share starts increasing, correspondingly.

Finally, the customer becomes the sole owner of theproperty after having purchased all units from the Bank,along with the rentals thereon.

CUSTOMERBANK

Joint

Ownership

Musharaka

Gradual Transfer ofOwnership


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Shariah Principles


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Shariah Principles

To create joint ownership in property is calledShirkat-ul-Milk and is expressly allowed by all

schools of IslamicJurisprudence. All Muslim Jurists agree on the permissibility of

the Financier leasing his share in property toclient and charging him rent i.e. the permissibilityof leasing ones share to his partner.

There is difference of opinion among leasingones share to a third part But there is nodifference on permissibility on leasing to apartner.


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Shariah Principles

Promise of client to purchase units ofshare of financier is also allowed.

The Transactions cannot be combined ina single arrangements and they have to beexecuted independently. This is because itis a well settled rule of IslamicJurisprudence that one transaction cannot

be made a condition for another. Instead of making the transactions apre-condition for one another there can beone-sided promises from one party toanother


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Argument:In the case of promise to sell units of share

by financier one might argue that if thepromise to sale has been done beforeentering into actual sale This is practicallyputting a condition on the sale itselfAnswer:

There is a difference between: Putting acondition on a sale and making a separatepromise , without making it a condition.In case of condition, the sale will be valid

only if the condition is fulfilled.

Shariah Principles


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Diminishing Musharakah-Considerations

Joint

Joint TitleTitle Holder

Profit Rate Fixed/Variable

Prepayment Allowed Yes

Refinance Available Yes

Asset Risk

Late Payments Control able

Consideration Flexibility Available


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The arrangement is composed of thefollowing transactions

1. To create joint ownership inproperty

2. Giving share of financier to clienton rent

3. Promise of client to purchaseunits of share of financier

4. Purchase of financiers units5. Adjustment of rental according of

share of financier in property

House Financing Based on Diminishing Musharakah


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1. Diminishing Musharakah Agreement Islamic Housing Finance AgreementPurpose: This is the main agreement thatestablishes Banks share in the Musharakah

Property.Components:- Both parties share- Musharakah Property detail

2. Monthly Payment Agreement (RentAgreement)

Purpose: This agreement is signed afterMain Musharakah Agreement. Bank givesout its share to the customer via thisagreement.Components:

- Rent Schedule

- Formula of calculation

Legal Documentation


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Legal Documentation

3. Undertaking to Purchase MusharakahUnitsPurpose: This is an undertaking by thecustomer to purchase Banks Musharakah

units.Components:

- Normal Sale Price- Additional Unit Purchase Price

4. Undertaking to Sell Musharakah UnitsPurpose: This is an undertaking by the Bankto sell Banks Musharakah units from time totime.Components:

- Normal Sale Price- Additional Unit Purchase Price


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Personal Information

Completed and signed ApplicationForm

Copy of CNIC Copy of Co-Applicant's CNIC /Passport

2 Passport size photos of Applicant /Co-Applicant's

Copy of rental docs (if applicable) Copy of Paid UtilityBills Borrowers Basic Fact Sheet Copy of Recent Credit Card Bills

Required Documents


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Income Information

Copy of recent Pay Slip / Employer Letter

Employer Certificate for salaried employees

incl. tenor / designation / salary Last 6 months Bank Statement

Copy of Management Accounts (if applicable)

Bank Statement of Business

Required Documents

In Case of Co-Applicant the Income

Related documents will also be required

for the Co-Applicant as well.


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Business / Professional Information

3 Years Proof ofBusiness (eg: Tax

Return/Bank Certificate)

Professional Association MembershipCertificate / Practice License

Professional Degree / Certificate

Property Documents

Copy of all related Property Title Documents

Approved Building Plan

Required Documents


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Equitable mortgage of the financed

property.

Any additional security as may be

determined by Bank.

Such security may be required if the

standing of the borrower does notmeet the credit underwriting

requirements of Bank.

Security


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An Illustration


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Step by Step Guide

Step1: Application FormSubmit the filled & signed application form &cheque for Processing Fee &External Agency cost

Step 2: Required DocumentsAttach all the required document

Step 3: Address VerificationBank will verify the Applicant Residential & Office

Addresses and Addresses of the Referencessubmitted


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Step by Step Guide

Step 4: Income EstimationFor Businessman / SelfEmployed IndividualsBank's External Consultant may determinecustomers monthly income.

For Salaried IndividualsBank will verify the Income with customersemployer

Step 5: Legal opinion

A legal opinion will be obtained on the propertydocuments

Step 6: Property ValuationAppointed Valuation Agency will evaluate theproperty to determine its market value.


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Step by Step Guide

Step 7: Credit Approval & Sanction LetterAfter customer have fulfilled all Credit requirementsatisfactorily, bank will give a conditional Sanctionletter

Step 8: Account OpeningCustomer will be required to open an account inbank by submitting a filled account opening form

Step 9: Signing of House Finance Agreement

Customer sign Islamic House Finance Agreementand other legal documents.For Building/Renovation/Replacement of houseOriginal Property documents will be handed over tothe bank at this stage.


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Step by Step Guide

Step10: Transfer of Property &Disbursement

In Home Buyer CasesBank's Sales officer & authorized lawyer willaccompany customer & Seller of the propertyto the Registrar office for PropertyTransfer.

Original Property documents will be handedover to the Lawyer who, after verification ofthe document, will handover the Pay Order tothe Seller and will complete the legalformalities on Bank's behalf


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Common FAQs

What method of Islamic Financing is used inHouse financing?

What makes Islamic House financing Shariahcompliant and how does it differ from aconventional mortgage?

Why is the profit margin charged byBank

correlated to the conventional mortgage markettrends?

How much time do you take to approve thecase?

Is this rent variable or fixed?


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Common FAQs

For how many days can I delay my monthlyinstallment?

What would be the Banks approach, if I fail to paymy monthly installment?

Do you have any alternative for Insurance?

What is the process for earlypayment /termination ofproperty?


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Howisthefundamental nature ofthe contract a co-

ownership and not a loan?

The nature of the contract is a co-ownership and not a

loan because the transaction is not based on the

lending and borrowing of money but on the joint

ownership of an asset. Banks shares in the cost of

asset being purchased, i.e. the house or in case of areplacement contract bank purchases a portion of the

house from consumer and become a co-owner.

Key FAQs at this point


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Key FAQs

Whatisthe difference betweentheprofit

Bank charges and theinterest charged in

conventional mortgages?

In conventional mortgages the interest charged

is a mark-up on the money lent. The profit

charged by Bank is the utilization payment for

the consumers use of banks share throughoutthe life of the contract. The profit is

predetermined based on market trends.


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THANK YOU

Ph: 021-9212509, Fax: 021-9212472

Email: [email protected]

http://www.sbp.org.pk/departments/ibd.htm