MURABAHA

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Diminishing Musharakah By Mahmood
Shafqat Senior Joint Director -Islamic Banking
Department - SBP At AlHuda Centre of Islamic
Banking Economic Workshop Sheraton Hotel
Karachi.
The views expressed in this presentation are
those of the author and do not necessarily
represent State Bank of Pakistan
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• Diminishing Musharakah - Introduction
• Basic Structure
• Shariah Principles
• Illustration

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Diminishing Musharakah-Introduction
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• Shirkah means Sharing in the terminology
  of Islamic Fiqh.
• Musharakah is basically a kind of partnership in
  which the partners join together with their
  contributions for the common objective of
  undertaking business and trade in accordance with
  the principles of Shariah.

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• It has been divided into two kinds
• SHIRKAT-UL-MILK
• It means joint ownership of two or more persons
  in a particular property.
• SHIRKAT-UL-AQD
• Which means a partnership effected by a mutual
  contract.

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• Based on Shirkat-ul-Milk
• Means joint ownership in a property
• Three components
• Joint ownership of the Bank and customer
• Customer as a lessee uses the share of the bank
  
• Redemption of the share of the Bank by the
  customer

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• Diminishing Musharakah is commonly used for the
  purpose of financing of fixed assets by various
  Islamic banks.
• House financing
• Car Financing
• Plant and machinery financing
• Factory/Building financing
• Agriculture land financing
• All other fixed Assets

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• Musha means undivided ownership of the asset
• Lease of Musha
• It is allowed to lease Musha to other joint owner.

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Basic Transaction Structure
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Rent

• The customer approaches the Bank with the request
  for Project/Machinery/House financing

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

• Customer pays rent for the use of banks share in
  the property

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Gradual Transfer of Ownership

• The customer approaches the Bank with the request
  for Project/Machinery financing

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

• Customer pays rent for the use of banks share in
  the property

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

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Gradual Transfer of Ownership

• The value of Banks share in Musharakah property
  is divided into units, which it sells to the
  customer. Units will be worked out by dividing
  Banks financed amount by number of months for
  which finance to be allowed.
• With each purchase of unit by the customer, the
  Banks share in the Musharakah property starts
  diminishing, whereas customers share starts
  increasing, correspondingly.
• Finally, the customer becomes the sole owner of
  the property after having purchased all units
  from the Bank, along with the rentals thereon.

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Shariah Principles
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• To create joint ownership in property is called
  Shirkat-ul-Milk and is expressly allowed by all
  schools of Islamic Jurisprudence.
• All Muslim Jurists agree on the permissibility
  of the Financier leasing his share in property to
  client and charging him rent i.e. the
  permissibility of leasing ones share to his
  partner.
• There is difference of opinion among leasing
  ones share to a third part But there is no
  difference on permissibility on leasing to a
  partner.

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• Promise of client to purchase units of share of
  financier is also allowed.
• The Transactions cannot be combined in a single
  arrangements and they have to be executed
  independently. This is because it is a well
  settled rule of Islamic Jurisprudence that one
  transaction cannot be made a condition for
  another.
• Instead of making the transactions a
  pre-condition for one another there can be
  one-sided promises from one party to another

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Argument In the case of promise to sell units
of share by financier one might argue that if the
promise to sale has been done before entering
into actual sale This is practically putting a
condition on the sale itself Answer There is a
difference between Putting a condition on a sale
and making a separate promise , without making it
a condition. In case of condition, the sale
will be valid only if the condition is fulfilled.
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Consideration
Flexibility Available
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• The arrangement is composed of the following
  transactions
• 1. To create joint ownership in property
• 2. Giving share of financier to client on rent
• 3. Promise of client to purchase units of share
  of financier
• 4. Purchase of financiers units
• 5. Adjustment of rental according of share of
  financier in property

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Diminishing Musharakah can be used for financing
with the following conditions

• The agreements of joint purchase, Lease and
  selling of units should not be tied-up together
• At the time of purchase, sale should be effected
  through offer and acceptance
• Preferable to purchase each unit on market value,
  but permissible to purchase at agreed price

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1. Diminishing Musharakah Agreement Islamic
Housing Finance Agreement   Purpose This is the
main agreement that establishes Banks share in
the Musharakah Property. Components - Both
parties share      - Musharakah Property
detail 2. Monthly Payment Agreement (Rent
Agreement) Purpose This agreement is signed
after Main Musharakah Agreement. Bank gives out
its share to the customer via this
agreement.   Components - Rent Schedule -
Formula of calculation
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3. Undertaking to Purchase Musharakah
Units   Purpose This is an undertaking by the
customer to purchase Banks Musharakah
units. Components      - Normal Sale
Price - Additional Unit Purchase Price  4.
   Undertaking to Sell Musharakah
Units   Purpose This is an undertaking by the
Bank to sell Banks Musharakah units from time to
time. Components      - Normal Sale Price -
Additional Unit Purchase Price
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• Personal Information
• Completed and signed Application Form
• 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 Utility Bills
• Borrowers Basic Fact Sheet
• Copy of Recent Credit Card Bills

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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

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 of Business (eg Tax Return/Bank
  Certificate)
• Professional Association Membership Certificate /
  Practice License
• Professional Degree / Certificate
• Property Documents
• Copy of all related Property Title Documents
• Approved Building Plan

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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 not meet the credit
  underwriting requirements of Bank.

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An Illustration
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Step 1 Application Form Submit the filled
signed application form cheque for Processing
Fee External Agency cost   Step 2 Required
Documents Attach all the required document
  Step 3 Address Verification Bank will verify
the Applicant Residential Office Addresses and
Addresses of the References submitted

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Step 4 Income Estimation For Businessman / Self
Employed Individuals Bank's External Consultant
may determine customers monthly income. For
Salaried Individuals Bank will verify the Income
with customers employer Step 5 Legal opinion
A legal opinion will be obtained on the property
documents Step 6 Property Valuation
Appointed Valuation Agency will evaluate the
property to determine its market value.

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Step 7 Credit Approval Sanction Letter After
customer have fulfilled all Credit requirement
satisfactorily, bank will give a conditional
Sanction letter   Step 8 Account Opening
Customer will be required to open an account in
bank by submitting a filled account opening
form Step 9 Signing of House Finance
Agreement Customer sign Islamic House Finance
Agreement and other legal documents. For
Building/Renovation/Replacement of
house Original Property documents will be handed
over to the bank at this stage.

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Step 10 Transfer of Property Disbursement In
Home Buyer Cases Bank's Sales officer
authorized lawyer will accompany customer
Seller of the property to the Registrar office
for Property Transfer.   Original Property
documents will be handed over to the Lawyer who,
after verification of the document, will
handover the Pay Order to the Seller and will
complete the legal formalities on Bank's behalf

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• What method of Islamic Financing is used in
  House financing?
• What makes Islamic House financing Shariah
  compliant and how does it differ from a
  conventional mortgage?
• Why is the profit margin charged by Bank
  correlated to the conventional mortgage market
  trends?
• How much time do you take to approve the case?
  
• Is this rent variable or fixed?

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• For how many days can I delay my monthly
  installment?
• What would be the Banks approach, if I fail to
  pay my monthly installment?
• Do you have any alternative for Insurance?
• What is the process for early payment /
  termination of property?

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How is the fundamental nature of the 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 a
replacement contract bank purchases a portion of
the house from consumer and become a co-owner.
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What is the difference between the profit Bank
charges and the interest 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
throughout the life of the contract. The profit
is predetermined based on market trends.

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THANK YOU
Ph 021-9212509, Fax [phone] Email
mahmood.shafqat_at_sbp.org.pk http//www.sbp.org.pk/
departments/ibd.htm