Home Financing Through the Musharakah Mutanaqisah Contracts: Some Practical Issues

23 Pages Posted: 14 Nov 2017

See all articles by Ahamed Kameel Mydin Meera

Ahamed Kameel Mydin Meera

International Islamic University of Malaysia (IIUM)

Dzuljastri Abdul Razak

International Islamic University Malaysia - Department of Business Administration

Date Written: 2009

Abstract

The authors compare the al-Bay’ Bithaman Ajil (BBA) and the Musharakah Mutanaqisah Partnership (MMP) contracts. The BBA, a murabahah contract, was argued to be problematic and even unIslamic for long-duration contracts. The MMP contract which is a combination of musharakah (partnership) and ijarah (rental) contracts was argued to be a more appealing alternative. In the MMP, the equity of the financier diminishes progressively while, in accordance, the equity of the customer grows. Unlike for the BBA contract, scholars are consensus on the Shari’ah permissibility of the MMP contract. A mathematical derivation for the MMP showed that the formula for the MMP to be similar to the formula used in conventional loans but nonetheless with the interest rate replaced with the rental rate. Therefore, one major advantage of MMP was argued to be that it can avoid interest (riba) totally. Also, unlike under the BBA, the balance of financing, at any point in time, never exceeds the original price of the asset. Nevertheless, some practical issues need to be addressed particularly the means of estimating the rental rate, tax issues, defaults and asset value appreciation. This paper discusses these issues. When not profitable for the banks, when rental rates fall short of interest rates, the MMP can be implemented through cooperatives, which can be also an investment avenue for members.

Suggested Citation

Mydin Meera, Ahamed Kameel and Abdul Razak, Dzuljastri, Home Financing Through the Musharakah Mutanaqisah Contracts: Some Practical Issues (2009). Journal of King Abdulaziz University: Islamic Economics, Vol. 22, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=3069895

Ahamed Kameel Mydin Meera

International Islamic University of Malaysia (IIUM) ( email )

Dzuljastri Abdul Razak (Contact Author)

International Islamic University Malaysia - Department of Business Administration ( email )

Jalan Gombak
Kuala Lumpur, 53100
Malaysia

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