Ethica Institute of Islamic Finance™

What is a Diminishing Musharakah?

A Diminishing Musharakah is a temporary partnership where an asset or property is jointly purchased by two partners. Eventually, one partner acquires ownership of it through a series of property share purchases. The title of ownership of the property in a Diminishing Musharakah should ideally be in both the co-owners names. However, for regulatory reasons or to make use of available exemptions, it may be in the client's name since he will be the eventual owner at the end of the tenure. Islamic banks use Diminishing Musharakahs to extend long term financing to consumers and corporate clients. It substitutes conventional mortgage financing by providing fixed asset financing, capital project financing and home financing. The return on investment in a Diminishing Musharakah is calculated based on the frequency of the established tenure with the client. For instance if in a five year Musharakah, payments are made on a quarterly basis, the bank establishes its profit ratio as three month LIBOR. On the other hand, it is permissible to make early payments for a Diminishing Musharakah in order to gain complete ownership of the bank's share before the contract term ends. The price of the Diminishing Musharakah is a combination of the payment for the client's utilization of the usufruct of the Musharakah asset and the price of the bank's unit shares of ownership.

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