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Musharakah

A diminishing musharaka is a resent innovation. Its popularity originates from the fact that classical musharaka aims to involve bank as a permanent partner in the venture. This may not be a desirable idea for a financial intermediary. A financial intermediary likes liquidity in its investments or at least a finite maturity of its investments. In a declining musharaka, the bank’s share in the equity is diminished each year through partial return of capital. The bank receives periodic profits based on its reduced equity share that remains invested during the period. The share of the client in the capital steadily increases over time, ultimately resulting in complete ownership of the venture.