Why “Diminishing”
The bank’s ownership share diminishes over the life of the arrangement as the client progressively buys it out. In a conventional mortgage, the bank lends money and earns interest; the borrower owns the property from day one. In musharaka mutanaqisa, the bank actually co-owns the property, earns rent (not interest), and gradually exits as the client buys them out.
The Three Contracts
Musharaka (Partnership): Bank + client jointly purchase the property. Both are genuine co-owners. The bank’s contribution is e.g. 80%; the client’s is 20%.
Ijara (Lease): The client leases the bank’s share of the property from the bank, paying market-rate rent for the use of the bank’s portion. As the bank’s share decreases, the rent due to the bank decreases.
Bay’ Mutanaqis (Progressive Purchase): The client makes regular additional payments to purchase units of the bank’s share. Each purchase is a separate bay’ (sale) contract — the bank sells a 1% share to the client for fair market value.
Shari’ah Compliance Requirements
The bank must actually own: If the bank merely pretends to own (a legal fiction to justify the rent), the structure fails — the “rent” would be reclassified as interest.
Rental rate must be fair: The rent cannot be structured as a disguised interest rate. It must reflect fair market rent for the type of property.
Each purchase must be a genuine sale: The client must have the option (though typically exercises the right) to purchase shares at market rate, not at a pre-set price.
See also: Fiqh Al Musharakah, Fiqh Al Ijarah, Fiqh Al Bay Al Amanah, Fiqh Al Mudarabah Al Mutlaqa, Fiqh Al Gharar