Definition of musharakah mutanaqisah
Musharakah mutanaqisah or “diminishing musharakah” is an innovative form of musharakah which has been developed by contemporary scholars and not found in classical fiqh books. However, it has gained popularity in Islamic banks and financial institutions and used for various purposes especially for home financing and car financing. It is the combination of three Shariah contracts namely musharakah, ijarah and sale. The Bahrain-based standard setting body “Accounting and Auditing Organization for Islamic Financial institutions (AAOIFI) explains diminishing musharakah as follows:
“Diminishing musharakah is a form of partnership in which one of the partners promises to buy the equity share of the other partner gradually until the title to the equity is completely transferred to him”.
To simplify this definition, the customer and financial institution enters into joint ownership of property or vehicle. The customer starts purchasing the shares of the financial institution in the form of small units gradually, until he becomes the sole owner of the property. At the same time, the financial institution leases his shares of property to customer.
1. Joint ownership of the property (Musharakah)
(a) At the first stage, the customer identifies the property and approaches the bank for financing.
(b) The customer and Islamic bank enter into joint ownership contract to buy the property.
(c) The initial down payment from the customer is considered his contribution in musharakah venture and the financing given by bank is regarded his contribution.
Practical steps of musharakah mutanaqisah
Musharakah mutanaqisah is an innovative and hybrid product. It is widely used in prevalent Islamic banks. Therefore, we need to learn how it works in modern Islamic financial institutions and what are the practical steps and stages of this arrangement. Basically, it is designed on different Shariah contracts: musharakah, ijarah (lease) and sale. To illustrate these steps, musharakah mutanaqisah home financing case study has explained in the following
(2) Leasing (Ijarah)
(a) In the second stage of this arrangement, the Islamic banks leases his shares in the property / house to the customer.
(b) The bank charges rent from the customer on his shares in the house. It is allowed for a partner to lease his undivided share in a property to another partner.
(3) Sale (Bay)
The customer purchases the bank’s shares through the lease period. Based on agreed time intervals, the customer acquires the shares of the bank gradually. Over the financing period, the customer become the sole owner of the property.
Criticial conditions for musharakah mutanaqisah
There are various technical and Shariah issues in musharakah mutanaqisah which has been raised by scholars and researchers in contemporary literature of Islamic financial contracts. I cannot go to those complex details in this short article. However, it is worth to mention that the arrangement of two or more contracts in one package (as it is the case in musharakah mutanaqisah) is debated among scholars. In this regard, it is concluded that there are two main conditions for the validity of this type of transaction:
(a) Every contract must be independent from other and there should not be any conditions which indicate any kind of connection or link between both contracts or make them interdependent.
(b) Every contract must be permissible independently from Shariah point of view.