Diminishing Musharaka
In one sentenceA partnership in which one partner gradually buys the other's share in installments until it owns the asset or project entirely at the end of the term.
Simply put
It is used to finance property and assets: the bank and the client co-own the asset, then the client buys the bank's shares in installments, so the bank's share and its portion of the return fall with each payment.
If the asset is leased out, or the client uses it in return for rent, the rent is divided according to the shares outstanding when it falls due, so the bank's share of the rent decreases as the client's share increases.
Worked example
A warehouse worth 1,000,000 SAR, 80% owned by the bank and 20% by the business, is leased at 100,000 SAR per year. At the end of the first year the business bought an additional 10% of the bank's share.
First-year rent to the bank: 100,000 × 80%80,000 SAR
First-year rent to the business: 100,000 × 20%20,000 SAR
Bank's share after the purchase: 80% − 10%70%
Second-year rent to the bank: 100,000 × 70%70,000 SAR
Decrease in the bank's share of the rent: 80,000 − 70,00010,000 SAR
Don't confuse it with
MusharakaIn a fixed Musharaka the partners' shares stay the same until the project ends; in a diminishing one, ownership passes gradually to one of them.