PARTNERSHIP ON THE PRECIPICE: DEFAULT IN DIMINISHING MUSHARAKAH

AUTHOR – MOHD SALAH KHAN, SHEHVAR SALEEM & MD SAQIB ANSARI

STUDENTS AT NATIONAL LAW INSTITUTE UNIVERSITY

BEST CITATION – MOHD SALAH KHAN, SHEHVAR SALEEM & MD SAQIB ANSARI, PARTNERSHIP ON THE PRECIPICE: DEFAULT IN DIMINISHING MUSHARAKAH, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 6 (3) OF 2026, PG. 493-510, APIS – 3920 – 0001 & ISSN – 2583-2344.

ABSTRACT

This article critically examines the legal architecture of the Diminishing Musharakah (DM), widely regarded as the most prominent Shariah-compliant alternative to the conventional interest-based mortgage, with particular attention to the legal consequences of customer default. The DM is structured as a compound arrangement consisting of three distinct but interrelated contracts: a shirkat al-milk establishing joint ownership between the bank and the customer, an ijarah under which the customer leases the bank’s ownership share, and a series of sale transactions executed through a unilateral purchase undertaking that progressively transfers full ownership to the customer. While this structure is widely praised for embodying the Islamic principles of asset-backing, risk-sharing, and equitable participation in profit and loss, the article argues that significant jurisprudential tensions arise at the moment of default.

Standard-form DM agreements typically authorize the bank to initiate a forced sale of the jointly owned property in order to recover its investment, a mechanism that appears to conflict with the classical rules of fiqh governing co-ownership, which generally prohibit one partner from compelling the sale of jointly held property without the other partner’s consent or judicial authorization. The article therefore evaluates the principal doctrinal justification advanced by contemporary Shariah supervisory boards: that the customer’s agreement to the default clause at the inception of the contract constitutes valid prior consent to the sale. Through a doctrinal analysis of classical Islamic partnership law and modern Islamic finance practice, the article concludes that while the prior consent argument offers partial justification for the default mechanism, it remains jurisprudentially incomplete, particularly in relation to informed consent, the absence of judicial oversight, and the asymmetrical allocation of remedial authority within the contractual framework.