Ruling of Diminishing Musharakah (Partnership) Financing
21-6-2025 | IslamWeb
Question:
An Islamic finance co-op here offers home financing via diminishing Musharakah. Monthly payments include: (1) rent based on market valuation, (2) share buybacks from the bank, (3) profit markup on each share sold (a profit % applied on each share), and (4) the bank pays a proportional share of costs based on its ownership -e.g. utilities, bills, etc. Rent and profit rates are reviewed every few years.Is this halal and compliant with Shariah?
Answer:
All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad, sallallaahu`alayhi wa sallam, is His slave and Messenger.
Diminishing Musharakah (partnership) financing is permissible if it is conducted in accordance with Shariah guidelines, as affirmed by the Islamic Fiqh Academy and other reputable bodies. The key conditions for its permissibility are as follows:
1. There must be a real partnership between both parties, where each bears any losses in proportion to his ownership percentage.
2. The promise to purchase the partner’s share should come from one party only. Ownership must transfer through separate, independent sale contracts for each share.
3. The purchase price of the shares should be determined at market value on the same day of concluding the sale transaction, not at the original purchase price, in order to avoid providing a guarantee of the principal (the original amount of finance).
4. It is permissible for one partner to lease the other’s share, provided that maintenance expenses are shared as per the ownership percentage of the partners.
5. The partnership, lease, and sale contracts must be kept independent from each other and clearly defined.
6. There should be no stipulation in the contract that gives any of the parties a right to get back his subscribed principal.
As for the transaction details mentioned in your question, they were not clearly explained, so it’s not possible to give a specific ruling concerning that transaction. It is advisable to consult local Islamic centres in your country or the Islamic finance institution involved to clarify the Shariah compliance of that transaction and identify the Shariah board that approved it.
Lastly, some contemporary Shariah boards have allowed the rental payments to vary in line with the property's market value, as long as the method of valuation is based on a clear and undisputed standard.
Allah knows best.