Abstract
Diminishing Musharakah Mutanaqisah Partnership (MMP) contract has been offered by Islamic banks in Malaysia, this study aims to presents the result of a comparison made between the theoretical explanations of how the MMP works and what is actually being done in practice. This study makes use of a qualitative approach in analysing how the MMP works in practice. It then makes a comparison between the MMP as being practiced in real situation and what theoretical writing tells us to expect by analysing an offer letter of a customer of HSBC Amanah Malaysia. Further research is carried out on home financing packages offered by 10 local Islamic banks and 6 foreign Islamic banks by calling the banks and walking into the branches. Our findings reveal that HSBC Amanah Malaysia is using base financing rate replacing the market rental rate of which the base financing rate is the same as base lending rate in the conventional housing loan. In addition, HSBC Amanah also imposes penalty charges on any early settlement and redemption. Other local and foreign banks are also using similar base financing rate to determine the rental rate and only a few of them are not imposing penalty charges on early settlement and redemption. This study provides result that HSBC Amanah’s Home Smart-i facility, the MMP in practice is moving towards a convergence to conventional banking and in fact, there is no difference with conventional housing loan. For HSBC Amanah to truly offer and reflect the principles and tenets behind MMP contracts, it has to make some amendments to the terms and conditions as stated in its offer letter for a diminishing musharakah mutanaqisah partnership contract.
Highlights
The fundamental essence of Islamic Finance is the avoidance of “Riba” in financial and economic transactions
Diminishing Musharakah Mutanaqisah Partnership (MMP) contract has been offered by Islamic banks in Malaysia, this study aims to presents the result of a comparison made between the theoretical explanations of how the MMP works and what is being done in practice
Our findings reveal that HSBC Amanah Malaysia is using base financing rate replacing the market rental rate of which the base financing rate is the same as base lending rate in the conventional housing loan
Summary
The fundamental essence of Islamic Finance is the avoidance of “Riba” in financial and economic transactions In achieving this with mortgage financing, there are principally two mostly used methods of home financing amongst others Al-Bay Bi-thaman Ajil (known as BBA) and the Musharakah Mutanaqisah Partnership (known as MMP). The periodic rental sum is shared between the client and the financier according to their capital contribution i.e., the percentage holding and this ratio varies with every payment with the customer’s ratio increasing with every payment. This continues until the asset is fully owned by the client (Meera and Razak, 2009)
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