All praise is due to Allah, and may peace and blessing be upon the Messenger of Allah.

To the upholders of virtue, the scholars:

Please advise and may you be rewarded.

What are the parameters that the bank must abide by in order for the process of buying a house with a diminishing partnership to be Sharia-compliant?

In the Name of Allah, the Beneficent, the Merciful,

All praise is due to Allah, and may peace and blessing be upon the Messenger of Allah, upon his household, his companions and whoever follows him. To proceed:

A diminishing partnership is one in which both parties agree to let one of the two parties relinquish his share in the partnership to the other party, either all at once or in stages, according to the terms agreed upon.

The description of this contract is that it is comprised of the following characteristics:

1. It must be an `inaan* partnership, it must not have anything that contradicts this partnership, it must not violate any unequivocal text or rule of Islamic law entirely. It must be a permissible contract.

2. There must be a promise from one of the two partners (generally the bank) to sell its share to the other partner.

3. The partner must sell his share in a contract independent of the partnership, either in part or in full, all at once or in stages.

Conditions for the permissibility of a diminishing partnership

Conditions for the permissibility of a diminishing partnership are no different from the conditions for a permanent partnership. The Islamic Banking Conference in Dubai set three conditions for this partnership, and they are:

1. The diminishing partnership must not be merely a method of financing by loan. There must be the actual intent of partnership, with the division of profit as agreed, and all parties must bear any loss.

2. The bank must own its share in the partnership fully. It must also enjoy full rights in administration and disposal. In the event that the partner has been authorized to do the job, the bank has the right to oversee performance and to follow it up.

3. The contract for a diminishing partnership must not contain a condition requiring the partner to return his entire share of the capital to the bank in addition to any profit due to him, because that is suspiciously similar to riba.

Models for a diminishing partnership

There are three models for a diminishing partnership that will end in ownership and in which the bank invests its wealth:

The first model: The bank agrees with its business associate to specify each party's share in the partnership's capital and its conditions. This is permissible in Sharia if the bank's shares have been sold to the associate after the partnership has been established in an independent contract, such that the bank is free to sell its shares to an associate, whether his partner or anyone else, just as the associate has the right to sell his share to the bank or to anyone else. This is the clearest model in that the sale contract is separate from the partnership contract in a completely clear fashion.

The second model: The bank agrees with its business associate on a partnership, either fully financed or partially, in a business venture expected to generate income. This is on the basis of the bank's agreement with the other partner—that the bank gets a certain percentage of the actual gross income—while maintaining the right to keep the remaining portion of the revenue, or whatever amount of it has been agreed upon, in order for that portion to be designated for repaying the principle the bank put forward for financing. In other words, in this model, part of the share is repaid from the income generated.

The third model: Both the bank and the partner specify a share in the form of stock representing a conglomeration of the value of the object designated for the partnership (real estate, for instance), and each of the two partners (the bank and the business partner) get a share of the actual income from the real estate.

If he wants, the partner can acquire a certain number of these stocks owned by the bank every year, such that the shares present in the possession of the bank are diminishing, until the bank's partner completely owns the stock, so full ownership of the real estate becomes his, without the other partner.

This model of gradual takeover of the bank's shares is the most common model, for the business partner pays the bank the price of its shares periodically from the returns that come to him or from any other outside source, and this is over a suitable, agreed upon term. When repayment has finished, the bank withdraws from the business venture, and as a result, the business partner achieves full ownership of the investment project in which they were partners.

And Allah Almighty is the Most High, and He knows best.

*an `inaan partnership: is correct with equal investment and differential profit, with unequal investment and equal profit, or with each of the two partners having unequal investment from each other.