Q. Please comment on the Diminishing Mushaarakah concept. By this agreement a person simultaneously leases and buys the same property from the financier (the bank). The bank purchases the property and leases and sells it to the client. From the monthly rental a sum is deducted as a payment on the property. So each month the client’s ownership increases a percentage while the ownership of the bank decreases by that percentage. At the end of the contract term, the client becomes the sole owner of the property. Is this deal permissible? According to Mufti Taqi Usmaani this deal is permissible.
A. There is no ‘diminishing mushaarah’ concept in the Shariah. Shorn of technicalities and legal terminology, the transaction is simply as follows:
(1) Zaid approaches the bank to purchase a house for him.
(2) The bank agrees to buy the house for him on the basis of the following conditions:
(a) That Zaid gives a written undertaking that he will buy the house from the bank.
(b) That Zaid undertakes to lease the house from the bank, and simultaneously purchase it. Thus this is a double deal in a single contract regardless of the different documents drawn up. It is a deal consisting of a lease and a purchase at the same time.
(c) Zaid will make monthly payments. Part of his payment will be rental and part will be deducted as payment on the purchase price of the house. This is what the fabricators of this contract call diminishing mushaarakah, but in the Shariah there is no such transaction which is a combination of two transactions in a single deal.
(d) with each monthly payment Zaid makes, his ownership increases proportionately, until at the end of the period he becomes the owner of the house. In essence – in reality, Zaid enters into 60 new sale transactions if the repayment period is 60 months. Each month he ‘buys’ a percentage of the house in lieu of the amount deducted from his monthly payment. Thus, in this deal, there is not only two transactions. There are 62 transactions. The first two are the initial purchase and lease agreement, and the 60 are the subsequent monthly acts of purchase.
Contrary to the claim that the promise is not enforceable, it is indeed legally enforceable in terms of kuffaar law. The very purpose of the written undertaking is to oblige Zaid in the event he reneges from the promise.
(3) Since the very initial contract is baatil it is superfluous to delve into the other issues. The bottom line is that the property is ‘sold’ and ‘leased’ to Zaid in a single deal His ownership is incremental over the 60 months. Every month he ‘purchases’ a small percentage of the property, and all of this is incumbent in terms of the initial agreement.
(4) We observe that whenever the bankers are bereft of Shar’i argument, they resort to the taqleed of Mufti Taqi Usmani. Please be informed that we do not follow the venerable Mufti. We are in conflict with him on a range of issues.
(5) The contract may be made to conform to the Shariah by means of a simple agreement of sale. If the bank purchases the property for $50,000, for example, and if it wants to make a profit of $30,000 for example over a period of 5 years, the simple and straightforward way is to sell the property to Zaid for $80,000 payable over 60 months or whatever period is mutually agreed on. What is the need for the rigmarole and the laboriously worded contract which the banks usually fabricate, and which contains a number of Islamically corrupt conditions?
We fail to understand why the Muslim banks are so intransigent in their insistence to follow the capitalist system. With a simple contract, as outlined above, the banks can make the same profit which they expect to make with the corrupt ‘diminishing mushaarakah’ contract. What then is the need to simultaneously enter into a sale-cum-lease agreement? Brothers, please give this issue further reflection to bring your dealings within the confines of the Shariah.