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DIMINISHING MUSHARAKA Ch Hamad Rasool Bhullar AlHuda – CIBE Trainings – Nov 29, 2011

Ch hamad rasool bhullar

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Page 1: Ch hamad rasool bhullar

DIMINISHING MUSHARAKA

Ch Hamad Rasool BhullarAlHuda – CIBE Trainings – Nov 29, 2011

Page 2: Ch hamad rasool bhullar

Diminishing Musharakah- Concept

Based on Shirkat-ul-Milk (joint ownership) “the combination of assets of two or more persons in a manner that creates a state of sharing in the realized profit or income or benefiting from an increase in the value of the partnership assets. This combination of assets for making profit necessitates losses, if any. This partnership is created by the wish of the partners such as when two or more parties acquire common shares in a particular asset.”

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Diminishing Musharaka - Explained A diminishing musharaka is a partnership

between an IFI and customer who participate in joint ownership of property or Asset

Share in ownership of IFI is divided into parts with the understanding that the customer will gradually purchase that share via periodic payments.

The objective is for the customer to become the sole owner of the property or enterprise eventually

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Diminishing Musharaka – Explained

Throughout the financing period, the IFI, as joint owner, must share risks and liabilities associated with ownership

Therefore, the IFI’s share in the equity declines each Period through partial return of capital. The financier receives periodic profits based on its reduced equity share that remains invested during the period.

The share of the client in the capital steadily increases over time, ultimately resulting in complete ownership of the venture. The profit share of the client goes to the MFI as a repayment of the equity.

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Areas of Applications

The housing sector has witnessed greater use of diminishing musharaka than any other sector, since the expected profits from this business would be sourced from rentals that are predictable to a considerable degree.

It is also observed to be quite promising in the field of microfinance or financing of small and medium enterprises.

Purchase of a Farm House with constructed Construction of a

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The Transaction and its Flow over Time

The Process of the deal

Islamic FI ClientJointly

Own and buyAsset

Buys through Monthly Payments =

Rental + Ownership Units

Asset becomes the Ownership of Client

Client Pays Islamic IFI Receives

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DM for MFIs Agreements and Contracts

Diminishing Musharakah Agreement Ijarah (Rental) Agreement Agreement To Purchase With the standard documents on unit

transfer as purchased from time to time

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The steps involved in Transaction

1. Customer request an IFI for an Asset Investment.

2. IFI agrees to provide financing based on Criteria.

3. Joint Ownership Agreement is executed between the IFI and the Customer.

4. IFI will purchase its agreed share in the property by paying to the supplier.

5. Customers pays his/her share to supplier.

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The steps involved in Transaction

6. IFI’s share is divided into agreed number of units.7. Customer agrees to buy IFI’s share (units) on a

monthly basis and the Undertaking is executed by the customer.

8. Customer pays the rent for the usage of the IFI’s units.

9. Rental reduces after purchase of each unit by the customer.

10. After purchase of all units ownership of the asset is completely transferred to the customer.

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Other Features of DM

Joint ownership with the client Sharing the profits and losses Parties are Responsible (as a co-owners) for any

damage to the structure of the house/property Eligibility criteria, financing limits and profit rates may

vary based on assessment and location(s) Flexible in Payments as agreed between the parties Rental Charged when the client gets legal possession

of the property

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Risk Areas

Default Risk Asset Risk

• Destruction of Asset• Death of Client

Legal Issues – Legal Rights of Heirs in case of untimely death

– Testing of Documentation in Courts Delayed PaymentsClients Friendly and flexible

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Many Thanks

For listening with PatienceAny Questions are welcomed

[email protected]