Exposure Draft of Islamic Financial Accounting Standard (IFAS) 4 on Diminishing Musharaka

The Institute’s Committee on Accounting and Auditing Standards for Interest Free Modes of Financing and Investments (the Committee) has developed an Exposure Draft (ED) of Islamic Financial Accounting Standard 4 (IFAS-4) on “Diminishing Musharaka”.


In Pakistan, Diminishing Musharaka (DM) based on Shirkat-ul-Milk, whereby the ownership can be transferred gradually, is the third common Islamic financing mode after Murabaha and Ijarah, and in terms of total exposure of the Islamic banking institutions, it is now surpassing Ijarah. DM arrangement is a hybrid transaction comprising three different transactions including i) Musharaka Agreement, ii) Rental/ Ijarah Agreement and iii) Undertaking for buying units gradually over time. These transactions are being generally used for the housing finance, corporate and commercial long term financing, debt swap with Shariah compliant alternative and Sukuk. Shariah Essentials have also been issued by the State Bank of Pakistan (SBP) on the DM for Shrikat-ul-Milk.

The Committee consisting of various stakeholders, regulators, scholars and practitioners has deliberated the IFAS-4 in detail and has given due consideration to the local scenario and market practices. Accordingly, the IFAS-4 has been drafted by the Committee to be used for DM transactions based on the current market practices in Pakistan.

IFAS-4 was first exposed in 2014 to the key stakeholders, such as CFOs and Shariah scholars of the banks. The comments received then have been duly considered by the Committee and appropriate amendments have been made in the IFAS-4. The Committee after detailed consideration is pleased to again expose the draft IFAS-4 on “Diminishing Musharaka for the purpose of members’ consultation.

You are invited to offer your comments on the ED of IFAS-4. The comments would be more helpful if they indicate the specific paragraph or group of paragraphs of ED to which they relate, clearly explaining the issue(s), and providing a suggestion for the alternative text or solution preferably giving rationale for the suggested change.

The full text of the draft standard can be downloaded from the Institute’s website at:        http://www.icap.net.pk/wp-content/uploads/2013/12/IFAS-4-DM-ED-Feb-17-2017.pdf

You are requested to send your valued comments to the Directorate of Technical Services at   dtscomments@icap.org.pk  latest by March 24, 2017.

Circular 4 – Exposure Draft of IFAS-4 Diminishing Musharaka