Understanding Islamic Finance - Doha Academy of Tertiary Studies

340 Understanding Islamic Financea vehicle, the price of share units cannot be fixed in the promise to sell. One partner mayagree to sell the units on the basis of valuation of the business at the time of the purchase ofeach unit. Such valuation may be carried out in accordance with the recognized principlesby experts, whose identity may be agreed upon between the parties when the promise issigned. At the time of purchase, the sale should be executed through offer and acceptance.Although the entrepreneur partner in DM for trade has an inherent motivation to acquirefull ownership by purchasing shares from the financier, the Sharī´ah experts are not inclinedto make the purchase binding on him. According to Resolution No. 2 of the Jeddah-basedOIC Fiqh Academy, and also research undertaken by the IRTI, the sale provision of thecontract can be made binding only on the financier partner and the sale will be effected atthe prices prevailing in the market at the time of actual sale. After creating joint ownership,the bank may sign a one-sided promise to sell different units of the share of its ownershipperiodically and may undertake that when the client purchases a unit of its share, the rentof the remaining units will be reduced accordingly. Thus, an Islamic bank will be making abinding promise to offer a specific part of its ownership of the project for sale on a specifiedfuture date for a price that will be determined at the time of actual sale. The entrepreneurpartner may voluntarily buy the share of the financier at the prices prevailing at the time ofsale in the stock market or at a price determined with the free consent of the parties.12.9.2 Procedure and Documentation in Diminishing MusharakahThe following is the sequence of documentation in a typical Diminishing Musharakaharrangement, as being used by Islamic financial institutions for housing finance business onthe basis of partnership by ownership:1. Creation of joint ownership through a Musharakah agreement; the customer and the IFIbecome co-owners in a joint property. If legal title to the property is already with thecustomer, there can be an agreement to the effect that the IFI will acquire a certain sharein the Musha‘a property and this would involve a sale and lease-back arrangement.2. Rent agreement. Both parties agree that the IFI will lease its undivided share to the clientpartner against a stipulated rental to be governed under the rules of Ijarah. This agreementis signed after the Musharakah agreement. It contains details about rent, the formula ofits calculation and a schedule for the period of lease.3. Undertaking to purchase units of the bank’s share in the joint property. This is a unilateralpromise binding on the promisor only. Either the client or the bank can make this promise.If the arrangement is based on Shirkatulmilk, it may contain a price schedule at whichthe client has to purchase the units from time to time. It also gives details about thesituation if the client wants at any time, to purchase more shares than provided in themutually agreed schedule. The arrangement also contains details about the nature ofsecurity/guarantee to be provided by the client. Normally it is the equitable mortgageof the financed property. The bank may require additional security to secure its interest,particularly in view of the financial position of the client.Thus, the customer pays rent for the use of the bank’s share in the property and goes onpurchasing a part of the bank’s share periodically until the ownership of the asset is transferredto him. The facility can be provided for buying a house, building a house, renovationof a house and for replacing interest-based housing loans with a Sharī´ah-compliant arrangement(balance transfer facility). Other fixed assets can also be financed through DiminishingMusharakah.