Islamic Financing

In: Business and Management

Submitted By ireez99
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SUMMARY OF ARTICLE 6
TITTLE: Home Financing through the Musharakah Mutanaqisah Contracts: Some Practical Issues by Ahamed Kameel Mydin Meera and Dzuljastri Abdul Razak.

As an introduction, authors made a comparison between Al-Bay’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah Partnership (MMP) where they contended that MMP is better than BBA due to few reasons. BBA was claimed to has higher financing balance compared to conventional loan and on the other side as for bankers, liquidity management problem may arise because of BBA fixed financing mode that caused by cost of funds that based on floating rate whereas income are from fixed rate. Therefore, the authors did not favour BBA compared to MMP.

MMP is said to be based on a diminishing partnership concept. It has 3 stages; firstly, it is called musharakah where customer and bank join ownership together to own the asset being financed. Secondly, the bank leases its share in the asset ownership to the customer which this is called as ijarah. Thirdly, this is known as bay where customer gradually buys the bank’s 80% shares at an agreed portion periodically until the customer can fully own the asset. In the other words we can say that customer will pay periodic rental amount according to the agreed percentage which keeps changing. Share ratio owned by customer will increase as periodic redemption until finally the asset will be fully owned by him. There are main benefits derived from MMP, some of them are MMP is established as shari’ah compliant internationally unlike BBA, house under MMP is valued upon market price as well as rental that determined by market rental values, rental rate for asset under MMP can be revised periodically to reflect current market value and MMP is more flexible financing structure compared to BBA.

Generally, Islamic economics scholars in opinion that it is allowable to use…...

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