Accounting for Musharakah Mutanaqisah Home Financing: The Malaysia Case

Abstract

This paper examines accounting issues relating to Musharakah Mutanaqisah (MM) home financing from the perspective of Malaysian Islamic banks (IBs). Data for this study were obtained by collecting the relevant MM financing documents, conducting interviews with regulators and academics, and analyzing IBs’ financial statements. Some important practical issues in accounting of MM financing are highlighted. It is recommended that IBs consider underlying MM issues such as periodic valuation of MM assets and partnership shares of the asset in the post-valuation period. The current practice of MM financing involves two contracts, namely the MM contract for asset acquisition and the Ijarah contract for leases of the IB’s share of ownership in MM assets. It was found that all IBs disclosed their MM financing under the ‘Financing, Advances and Others’ category, and that revenue recognized from MM financing was calculated based on the effective profit rate method. The analysis reveals that IBs did not practice the following Musharakah unique characteristics as outlined in the literature: periodic valuation of property’s fair value or gradual transfer of ownership, share of related expenses. These findings indicate the absence of a true spirit of risk sharing between IBs and their customers. The limitation of this study is that it looks exclusively at Malaysian IBs and excludes the practices of IBs in other countries.