Concept of DM based Auto Financing:
Diminishing Musharakah (DM) is a partnership transaction in which the partners agree to terminate Shirkat (partnership) gradually by means of purchase of one partner's share by other partner.
Under Diminishing Musharakah financing, the Bank and its client participate in the ownership of an asset on the basis of 'Shirkat-ul-Milk' (i.e. Joint ownership)
A DM based Auto financing transaction comprises of mainly following three steps:
- Participation in the ownership of an asset by Bank and Client (i.e. creation of Musharakah) and dividing Islamic Bank's ownership share into a number of Musharakah units;
- Bank rents out its share of ownership in the asset to the Client (i.e. Ijarah transaction between Islamic Bank and Client); and
- Gradual sale of Musharakah units by Bank to the client on periodic basis and at the end of the financing tenure client becomes the sole owner of the asset.
A DM Financing is a combination of Musharakah, Ijarah and Sale transaction. Therefore, all rules pertaining to Musharakah, Ijarah and Sale transactions are applicable to a DM transaction.
All the three transactions are independent and are executed through separate contracts.