Musharakah Mutanaqisah Home Financing: Issues in Practice

Abstract

Musharakah Mutanaqisah (MM) mode of Islamic financing purchase of an asset, where the bank and customer enter into a contract of joint property ownership and the customer’s ownership of the asset gradually increases throughout the financing period and fully own the asset after the last financial settlement. This mode of financing was introduced to mitigate the issue of unequal risk burden of conventional mortgage financing, where the bank just provide the financing and the customer bears all risk. MM financing reflects a true partnership contract through sharing of risk and reward between both parties. Though the MM mode of financing has the salient features to address the flaws of conventional mortgage financing, there are is-sues of operating this mode of financing in practice. This paper examines the practical issues in the MM financing and subsequently, recommends possible solutions to mitigate these is-sues and improve the current practice. Among the pertinent issues highlighted are the use of interest based benchmark for profit calculation, and the application of historical cost value during the tenure of share transfer and the costs of insurance and revaluation borne by the customer.