Musharakah Mutanaqisah Concept

Musharakah Mutanaqisah Concept

Musharakah Mutanaqisah is based on diminishing partnership concept. It consists of three contracts which are musharakah, ijarah as well as bay(sale). First, the customer enters into a musharakah under the concept of Shirkat-al-Milk (joint ownership) agreement with the bank to co-own the asset being financed. Second, the bank leases its share in the asset ownership to the customer under the concept of ijarah. This is when the customer pays % of the asset cost as the initial share to co-own the asset whilst the bank provides for the balance of %. Third, the customer gradually buys the banks b% share at an agreed portion periodically until the asset is fully owned by the customer.

The periodic rental amounts will be jointly shared between the customer and the bank according to the percentage shareholding at the particular times which keeps changing as the customer purchases the financiers share. The customers share ratio would increase after each rental payment due to the periodic redemption until eventually fully owned by the customer.

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The modus operandi of the property financing product based on musharakah mutanaqisah is as follows:

1. A customers who wants to buy a property approaches the bank for financing
2. The bank and customer enter into musharakah agreement to jointly purchase the property based on an agreed share depending on the amount of financing requested
3. The deposit already paid by will be deemed as his initial share contribution
4. The customer will rent the bank’s shares of jointly acquired property through ijarah agreement
5. The instalment by the customer will be used to buy the share of the bank gradually until the entire bank’s share is owned by the customer

The permissibility of the Musharakah is agreed by the majority of scholars. Most of them argue that there is no specific evidence in the Quran and Sunnah that prohibit the Musharakah Mutanaqisah. Allah states that if a person dies without leaving behind any ascendants or descendants; but he has brothers and sisters more than two in number; then they will share a third of the property of the mortal. So, based on this verse the partnership of the property is legal in the shariah.

Musharakah Mutanaqisah Documents:

1. Promise (Waad)

2. MM facility agreement (to set terms for the MM and MM business)

3. Sales & Purchase (S&P) (or supplemental S&P, if the customer himself has signed the S&P with the Vendor before approaching the bank for fi nancing)

4. Ijarah lease agreement

5. Trust deed

Implementation of Musharakah Mutanaqisah

In regards to the implementation of Musharakah Mutanaqisah, it found that there are some legal issues pertaining to this concept. It includes issues of rental rate, waad, damage of property, tax and land ownership and else (Osmani and Abdullah, 2005). But, there are still many rooms for improvement to make the Musharakah Mutanaqisah more Shariah compliant otherwise it is just a replication to the conventional loan.

ISSUES

Interest rate as rental rate

The respective bank uses Islamic Bank Rate (IBR) with adjustment as the profit rate. The profit rate will be differing according to the financing amount and whether the property is already completed or under construction. For home financing range between RM 100 thousand to RM 500 thousand, the rate for the completed home will be IBR – 1.70% while for the under construction home, the rate is IBR – 1.60%. While for the home financing above RM 500 thousand, the adjustment rate is higher by 1% for both completed and under construction. The same goes to commercial property financing. The rate is different whether the amount of financing is RM 100 thousand below or above. For the completed property below RM 100 thousand, the rate is IBR – 1.30% while for under construction property, the rate is IBR – 1.20%. While for the financing amount above the RM 100 thousand, the adjustment rate is higher by 1% for both completed and under construction property.From here it seems that the bank still use conventional interest rate as a benchmark while if we follow the concept of Musharakah Mutanaqisah, the bank should use the rental rate. Besides that, as the IBR is based on Overnight Policy Rate of Bank Negara Malaysia.