Diminishing Musharaka. (For Shrikatul-Milk)
Diminishing Musharaka is a form of partnership in which one of the partners' promises to buy the equity share of the other partner gradually until the title of the equity share is completely transferred to him. This transaction starts with the formation of a partnership, after which buying and selling of the equity takes place between the two partners.

Principles of Diminishing Musharaka (Shirkatul-Milk)

1. Diminishing Musharaka (DM) is a form of co-ownership in which two or more persons share the ownership of a tangible asset in agreed proportion and one of the co-owners undertakes to buy in periodic installments of the proportionate share of the other co-owner until the title to such tangible asset is completely transferred to the purchasing co-owner.
2. Diminishing Musharaka can be created only in tangible assets. Diminishing Musharaka shall be limited to the specific assets(s) and not to the whole enterprise or business.
3. A DM would consist of the following three steps
   1. Creation of joint ownership between the co-owners.
   2. Renting out by one co-owner the undivided share in the asset owned to the other co-owner.
   3. Selling in periodic installments by one co owner his share to the other co owner(s).
4. All other terms and conditions as are essential to co-ownership, Ijarah and sale shall be fulfilled in respect of different stages in the process of DM arrangement.
5. Proportionate share of each co-owner must be known and defined in terms of investment.
6. Expenses incidental to ownership may be borne jointly by the co-owners in the proportion of their co-ownership.
7. Loss, if any, shall be borne by the co-owners in the proportion of their respective investments.
8. The amount of periodic payment would go on decreasing with purchase of ownership units by the purchasing co-owner.
9. Each periodic payment shall constitute a separate transaction of sale.
10. (a) Separate agreements/contracts shall be entered into at different times in such manner and in such sequence so that each agreement/contract is independent of the other in order to ensure that each agreement is a separate transaction.
    (b)The sequence of agreements in DM shall be as follows:
    
    1. There shall be agreement of co-ownership between the parties.
    2. There shall be an agreement of lease between the co-owners to lease out one's share in such property to another for an agreed periodic payment in consideration of the use of the formers share by the latter.
    3. An undertaking by one of the co-owners to the effect to purchase the units of other co-owner at a mutually agreed price until the entire ownership of the asset is transferred to the purchasing co-owner. Additionally, an undertaking shall be given by the other owner to the effect that he will sell the units owned by him to the first co-owner in the event the latter desires to purchase the units earlier than the agreed schedule on such price as may be mutually agreed.
    4. The sale of units by one co-owner to the other co-owner as aforesaid shall be documented in such a manner as the parties may mutually agree.
11. (a) In case a co-owner fails to honor the undertaking, as aforesaid with regard to the periodic payment and purchase of sale of units as the case may be, the asset may be sold in the open market and the co-owner aggrieved by such failure shall be entitled to recover:
    
    1. Actual loss, defined as the difference between the market price and price mentioned in the undertaking, if any, not being the opportunity cost.
    2. Any gain on sale of property, shall be shared by the co-owners in proportion of their respective investment at the time of such sale.
       
       
    (b) In addition to the above , the co-owner shall be entitled to recover outstanding periodic payment in respect of the period for which the other co-owner has actually used or possessed the asset which shall be payable to such co-owner.

Murabaha
Murabaha is also known as "Cost Plus" Financing. This is a sale where the seller discloses his cost and charges a profit on top. At RBS Islamic Banking, Murabaha is a 'buy and sell' transaction between the Bank and the Client, where the Bank purchases certain goods (as required by the Client) and sells them to the Client by adding profit to the cost. Thus Murabaha is not a loan given on interest; rather it is a sale of a commodity on spot or deferred payment.

Principles of Murabaha
The Seller (Bank) must own the commodity before selling it to the Client. The commodity must come into the Bank’s possession, whether physical or constructive (through an agent). Hence the Bank’s ownership of the commodity is a must.

The Murabaha cannot be used as a mode of lending rather it is used when the Client needs assistance to purchase tangible assets / commodities. Therefore, Murabaha cannot be used to pay for commodities already purchased by the Client, or to pay utility bills, salaries or wages.

Precautions
In order to ensure proper execution of the Murabaha Sale in accordance to the principles of Islamic Shariah, the following precautions are observed:

• Murabaha Sale is only executed once the ownership of the asset / commodity has been acquired i.e. short sale and / or future sale is prohibited.
• RBS Islamic Banking ensures that it is not a buy back transaction.