form of Musharakah, developed in the near past, is 'Diminishing
Musharakah'. 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 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 him so as to make him the sole owner of the property, or the
commercial enterprise, as the case may be.
The Diminishing Musharakah
based on the above concept has taken different shapes in different
transactions. Some examples are given below:
1. It 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 required 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 while 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
goes on in the same fashion until after the end of 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%.
arrangement allows the financier to claim rent according to his proportion
of ownership in the property and at the same time allows him periodical
return of a part of his principal through purchases of the units of his
2. 'A' wants to purchase a taxi to use it for
offering transport services to passengers and to earn income through fares
recovered from them, but he is short of funds. 'B' agrees to participate
in the purchase of the taxi, therefore, both of them purchase a taxi
jointly. 80% of the price is paid by 'B' and 20% is paid by 'A'. After the
taxi is purchased, it is employed to provide transport to the passengers
whereby the net income of Rs. 1000/- is earned on daily basis. Since 'B'
has 80% share in the taxi it is agreed that 80% of the fare will be given
to him and the rest of 20% will be retained by 'A' who has a 20% share in
the taxi. It means that Rs. 800/- is earned by 'B' and Rs. 200/- by 'A' on
daily basis. At the same time the share of 'B' is further divided into
eight units. After three months 'A' purchases one unit from the share of
'B'. Consequently the share of 'B' is reduced to 70% and share of 'A' is
increased to 30% meaning thereby that as from that date 'A' will be
entitled to Rs. 300/- from the daily income of the taxi and 'B' will earn
Rs. 700/-. This process will go on until after the expiry of two years,
the whole taxi will be owned by 'A' and 'B' will take back his original
investment along with income distributed to him as aforesaid.
3. 'A' wishes to start the business of ready-made garments
but lacks the required funds for that business. 'B' agrees to participate
with him for a specified period, say two years. 40% of the investment is
contributed by 'A' and 60% by 'B'. Both start the business on the basis of
Musharakah. The proportion of profit allocated for each one of them is
expressly agreed upon. But at the same time 'B's share in the business is
divided to six equal units and 'A' keeps purchasing these units on gradual
basis until after the end of two years 'B' comes out of the business,
leaving its exclusive ownership to 'A'. Apart from periodical profits
earned by 'B', he gains the price of the units of his share which, in
practical terms, tend to repay to him the original amount invested by him.
Analyzed from the Shari‘ah point of view this arrangement is
composed of different transactions which come to play their role at
different stages. Therefore, each one of the foregoing three forms of
diminishing Musharakah is discussed below in the light of the Islamic
House financing on the basis of
diminishing Musharakah: - ( Top )
proposed arrangement is composed of the following transactions:
1. To create joint ownership in the property
2. Giving the share of the financier to
the client on rent.
3. Promise from the client to purchase
the units of share of the financier.
4. Actual purchase of
the units at different stages.
5. Adjustment of the rental
according to the remaining share of the financier in the property.
Let me discuss each ingredient of the arrangement in a greater
i) The first step in the above arrangement is to
create a joint ownership in the property. It has already been explained in
the beginning of this chapter that 'Shirkat-al-Milk' (joint ownership) can
come into existence in different ways including joint purchase by the
parties. This has been expressly allowed by all schools of Islamic
jurisprudence. Therefore no objection can be raised against creating this
ii) The second part of the arrangement is
that the financier leases his share in the house to his client and charges
rent from him. This arrangement is also above board because there is no
difference of opinion among the Muslim jurists in the permissibility of
leasing one's undivided share in a property to his partner. If the
undivided share is leased out to a third party its permissibility is a
point of difference between the Muslim jurists. Imam Abu Hanifah and Imam
Zufar are of the view that the undivided share cannot be leased out to a
third party, while Imam Malik and Imam Shafi‘i, Abu Yusuf and Muhammad Ibn
Hasan hold that the undivided share can be leased out to any person. But
so far as the property is leased to the partner himself, all of them are
unanimous on the validity of 'Ijarah'.
iii) The third step
in the aforesaid arrangement is that the client purchases different units
of the undivided share of the financier. This transaction is also allowed.
If the undivided share relates to both land and building, the sale of both
is allowed according to all the Islamic schools. Similarly if the
undivided share of the building is intended to be sold to the partner, it
is also allowed unanimously by all the Muslim jurists. However, there is a
difference of opinion if it is sold to the third party.1
clear from the foregoing three points that each one of the transactions
mentioned hereinabove is allowed per se, but the question is whether this
transaction may be combined in a single arrangement. The answer is that if
all these transactions have been combined by making each one of them a
condition to the other, then this is not allowed in Shari‘ah, because it
is a well settled rule in the Islamic legal system that one transaction
cannot be made a pre-condition for another. However, the proposed scheme
suggests that instead of making two transactions conditional to each
other, there should be one sided promise from the client, firstly, to take
share of the financier on lease and pay the agreed rent, and secondly, to
purchase different units of the share of the financier of the house at
different stages. This leads us to the fourth issue, which is, the
enforceability of such a promise.
iv) It is generally
believed that a promise to do something creates only a moral obligation on
the promisor which cannot be enforced through courts of law. However,
there are a number of Muslim jurists who opine that promises are
enforceable, and the court of law can compel the promisor to fulfil his
promise, especially, in the context of commercial activities. Some Maliki
and Hanafi jurists can be cited, in particular, who have declared that the
promises can be enforced through courts of law in cases of need. The
Hanafi jurists have adopted this view with regard to a particular sale
called 'bai-bilwafa'. This bai-bilwafa is a special arrangement of sale of
a house whereby the buyer promises to the seller that whenever the latter
gives him back the price of the house, he will resell the house to him.
This arrangement was in vogue in countries of central Asia, and the Hanafi
jurists have opined that if the resale of the house to the original seller
is made a condition for the initial sale, it is not allowed. However, if
the first sale is effected without any condition, but after effecting the
sale, the buyer promises to resell the house whenever the seller offers to
him the same price, this promise is acceptable and it creates not only a
moral obligation, but also an enforceable right of the original seller.
The Muslim jurists allowing this arrangement have based their view on the
principle that "
promise can be made enforceable at the time of need).
Even if the
promise has been made before effecting the first sale, after which the
sale has been effected without a condition, it is also allowed by certain
Hanafi jurists. 1
One may raise an objection that if the promise of
resale has been taken before entering into an actual sale, it practically
amounts to putting a condition on the sale itself, because the promise is
understood to have been entered into between the parties at the time of
sale, and therefore, even if the sale is without an express condition, it
should be taken as conditional because a promise in an express term has
This objection can be answered by saying that there
is a big difference between putting a condition in the sale and making a
separate promise without making it a condition. If the condition is
expressly mentioned at the time of sale, it means that the sale will be
valid only if the condition is fulfilled, meaning thereby that if the
condition is not fulfilled in future, the present sale will become void.
This makes the transaction of sale contingent on a future event which may
or may not occur. It leads to uncertainty (Gharar) in the transaction
which is totally prohibited in Shari‘ah.
Conversely, if the sale
is without any condition, but one of the two parties has promised to do
something separately, then the sale cannot be held to be contingent or
conditional with fulfilling of the promise made. It will take effect
irrespective of whether or not the promisor fulfils his promise. Even if
the promisor backs out of his promise, the sale will remain effective. The
most the promise can do is to compel the promisor through court of law to
fulfil his promise and if the promisor is unable to fulfil the promise,
the promise can claim actual damages he has suffered because of the
This makes it clear that a separate and independent
promise to purchase does not render the original contract conditional or
contingent. Therefore, it can be enforced.
On the basis of this
analysis, diminishing Musharakah may be used for House Financing with
a) The agreement of joint purchase,
leasing and selling different units of the share of the financier should
not be tied-up together in one single contract. However, the joint
purchase and the contract of lease may be joined in one document whereby
the financier agrees to lease his share, after joint purchase, to the
client. This is allowed because, as explained in the relevant chapter,
Ijarah can be effected for a future date. At the same time the client may
sign one-sided promise to purchase different units of the share of the
financier periodically and the financier may undertake that when the
client will purchase a unit of his share, the rent of the remaining units
will be reduced accordingly.
b) At the time of the purchase
of each unit, sale must be effected by the exchange of offer and
acceptance at that particular date.
c) It will be
preferable that the purchase of different units by the client is effected
on the basis of the market value of the house as prevalent on the date of
purchase of that unit, but it is also permissible that a particular price
is agreed in the promise of purchase signed by the client.
Diminishing Musharakah for carrying business of
services: - ( Top
The second example given above for diminishing musharakah is the
joint purchase of a taxi run for earning income by using it as a hired
vehicle. This arrangement consists of the following ingredients:
i) Creating joint ownership in a taxi in the form of
Shirkah al-Milk. As already stated this is allowed in Shari‘ah.
ii) Musharakah in the income generated through the services
of taxi. It is also allowed as mentioned earlier in this chapter.
iii) Purchase of different units of the share of the
financier by the client. This is again subject to the conditions already
detailed in the case of House financing. However, there is a slight
difference between House financing and the arrangement suggested in this
second example. The taxi, when used as a hired vehicle, normally
depreciates in value over time, therefore, depreciation in the value of
taxi must be kept in mind while determining the price of different units
of the share of the financier.
Musharakah in trade: - ( Top
The third example of diminishing Musharakah as given above is
that the financier contributes 60% of the capital for launching a business
of ready made garments, for example. This arrangement is composed of two
1) In the first place, the arrangement is
simply a Musharakah whereby two partners invest different amounts of
capital in a joint enterprise. This is obviously permissible subject to
the conditions of Musharakah already spelled out earlier in this chapter.
2) Purchase of different units of the share of the
financier by the client. This may be in the form of a separate and
independent promise by the client. The requirements of Shari‘ah regarding
this promise are the same as explained in the case of House financing with
one very important difference. Here the price of units of the financier
cannot be fixed in the promise to purchase, because if the price is fixed
before hand at the time of entering into Musharakah, it will practically
mean that the client has ensured the principal invested by the financier
with or without profit, which is strictly prohibited in the case of
Musharakah. Therefore, there are two options for the financier about
fixing the price of his units to be purchased by the client. One option is
that he agrees to sell the units on the basis of valuation of the business
at the time of the purchase of each unit. If the value of the business has
increased, the price will be higher and if it has decreased the price will
be less. Such valuation may be carried out in accordance with the
recognized principles through the experts, whose identity may be agreed
upon between the parties when the promise is signed. The second option is
that the financier allows the client to sell these units to any body else
at whatever price he can, but at the same time he offers a specific price
to the client, meaning thereby that if he finds a purchaser of that unit
at a higher price, he may sell it to him, but if he wants to sell it to
the financier, the latter will be agreeable to purchase it at the price
fixed by him before hand.
Although both these options are
available according to the principles of Shari‘ah, the second option does
not seem to be feasible for the financier, because it would lead to
injecting new partners in the Musharakah which will disturb the whole
arrangement and defeat the purpose of diminishing Musharakah in which the
financier wants to get his money back within a specified period.
Therefore, in order to implement the objective of diminishing Musharakah,
only the first option is