Introduction: -
Another 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%.
This 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
share.
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 Shariah 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 principles:
House financing on the basis of diminishing Musharakah:
- ( Top )
The proposed arrangement is composed of the following transactions:
1. To create joint ownership in the property (Shirkat-al-Milk).
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 detail.
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 joint ownership.
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 Shafii, 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
It is 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 Shariah, 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 "
(the
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 preceded it.
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 Shariah.
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 default.
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 following conditions:
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 Shariah.
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.
Diminishing 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 ingredients
only:
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 Shariah 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 Shariah, 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 practical.
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