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 property or 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 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. Then 20% of the price is paid by the client and 80% of the price is paid 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 requirements 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 consequently 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 shares 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 and provide the funds for the purchase of taxi; therefore, both of them purchase a taxi jointly. 80% of the fund 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 provided to him and the rest 20%will be given to A, who has 20% share in the taxi. It means that Rs 800 is earned by B and Rs 200 is earned by A on the 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%, which means 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 whishes to start the business of ready-made garments but he has no required funds for that business. B agrees to provide the fund and participate with him for a specific period of time, 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 y 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 forgoing three forms of diminishing Musharakah is discussed below in the light of the Islamic principles.