Guidelines on dealing with a diminishing-share partnership

There is nothing wrong with the transaction
mentioned, which is called a diminishing-share partnership. The guidelines
thereon are as follows: 

~1~

That you agree with a partner to put your
shares of the funds into building the flat, and the profit – namely the
returns from rent – should be shared out in accordance with whatever you
have agreed upon, and any loss should be proportionate to the amount of
money invested by each partner. So if construction will cost 70,000, it is
permissible to agree that he will pay 50,000 and you will pay 20,000; then
the distribution of the profits (rent) will be according to whatever you
have agreed upon, whether it is equal shares or less or more. But any loss –
if it occurs – should be proportionate to the amount of money that each of
you put in. 

~2~

That you agree that when construction is
completed, you will buy his share of the flat in portions, such as if you
divide his share into five portions for example, and you buy one portion
each month, and his share of the rent diminishes accordingly. So when you
have bought the first portion, his share of the rent will decrease by one
fifth, then when you have bought the second portion, his share of the rent
will decrease by two fifths. It is also permissible to leave his share of
the rent as it is, as was mentioned in al-Ma‘aayeer ash-Shar‘iyyah
(p. 207) 

~3~

That there should be a binding promise from
one of you in which he pledges to buy or sell the portions of his partner
gradually, and the other party will have the option of accepting or
rejecting that. It is not permissible for this promise to be binding on both
parties, because it comes under the rulings on transactions (buying and
selling), and it is not permissible to engage in a transaction (sale) that
is to happen in the future, just as it is not permissible to stipulate the
condition of sale at the time of drawing up the partnership contract. 

~4~

The new sale contract should be drawn up at
the time of the sale of each portion. If the contract is verbal only, the
purchaser must express his wish to buy (the proposal) and the seller
responds by agreeing (acceptance). 

~5~

That selling should be done on the basis of
the market price at the time of the sale, not on the basis of the value of
the apartment at the time of drawing up the partnership contract. This means
that if a loss is incurred and the price of the flat drops, both parties
bear the loss according to their shares. It is not permissible to make a
promise to buy the shares based on their value at the beginning of the
project, because that is like offering a guarantee for the share of the
partner, which is not allowed. 

It says in a statement  of the International
Fiqh Council, which was issued during its fifteenth session in Muscat
(Sultanate of Oman) 14-19 Muharram 1425 AH/6-11 March 2004 CE, with regard
to diminishing-share partnerships and the shar‘i guidelines thereon: 

~1~

The diminishing-share partnership is a new
type of transaction. What it involves is a partnership between two parties
in a project that brings an income, in which one party pledges to buy the
share of the other party gradually, whether the purchase is done with income
acquired by the purchaser from this project or from any other source. 

~2~

The basis of the diminishing-share
partnership is the contract that is drawn up by the two parties, in which
each of them contributes a portion of the capital of the partnership,
whether his contribution is in the form of cash or materials, after
evaluation of the materials, with a stipulation of how the profits are to be
shared, on condition that both parties will bear losses – if incurred – each
according to his share in the partnership. 

~3~

What makes the diminishing-share partnership
different is the promise clause, which is a binding promise from one partner
only to buy the share of the other, provided that the other party has the
choice. That is done by making a new transaction contract every time the
purchaser wants to buy a portion of the other party’s share, even if that is
done verbally by means of proposal and acceptance. 

~4~

It is permissible for one of the two parties
to rent the share of the other party, according to set fees and for a
specific period. Both parties remain responsible for basic maintenance,
commensurate with each party’s share. 

~5~

The diminishing-share partnership is
Islamically acceptable if it is done within the general guidelines on
partnerships and if the following guidelines are adhered to: 

a.    
Neither party should be committed to buying the share of the other
party on the basis of the value of the shares at the time of forming the
partnership, because that comes under the heading of one partner
guaranteeing the share of the other partner. Rather the price of selling the
shares should be decided by the market value at the time of the transaction,
or on the basis of what they agreed at the time of the transaction.

b.    
There should be no stipulation that one party will be responsible for
insurance, maintenance and other expenses; rather these expenses are to be
covered by the partnership, each according to his shares.

c.     
The profit share of each party is to be defined in terms of a
percentage. It is not permissible to stipulate a specific sum from the
profits or a percentage of the money invested.

d.    
The partnership contract is to be kept separate from financial
commitments connected to the partnership.

e.    
It is not allowed to state that one of the two parties has the right
to withdraw what he offered of finance. 

End quote from Qaraaraat wa Tawsiyaat
Majma‘ al-Fiqh al-Islami 

In al-Ma‘aayeer ash-Shar‘iyyah (p.
206) it says: 

It is essential that the partnership
contract should not stipulate any condition of buying or selling. Rather the
partner may give a separate promise to that effect, that is not part of the
partnership contract. Similarly, buying and selling should be done on the
basis of a separate contract that is not connected to the partnership
contract. It is not permissible to include one of these contracts in the
other. End quote. 

If these guidelines are followed, then there
is nothing wrong with this transaction. 

And Allah knows best.