How Islamic is the Diminishing Musharkah Model used for Home Financing?

Zubair Hasan

Turkish Economic Review, 2016, vol. 3, issue 3, 443-452

Abstract: For financing consumer durables like houses, cars or computers, conventional banks use what are called the equated monthly installment (EMI) models. EMI is the fixed payment a borrower makes to a lender to pay off both interest and principal each month so that over a specified number of years, the loan amount is cleared in full. Islamic banks have followed the practice using EMI on diminishing musharakah partnership basis. The model is popularly known as the MMP, an abbreviation of its Arabic nomenclature. The defining character of this model is increasing amortization of capital through a customer buy back provision in the agreement. We have shown more than once that models of the sort invariably involve compounding of return on capital and pass the ownership of property to the client at a slower rate than the rate of capital amortization until the contract is concluded. This paper provides additional evidence and documentation to reiterate that the MMP exhibits the same characteristics and is not, therefore, Shari’ah compliant. We propose an alternative model free of the indicated blemishes, having additional advantages as well.

Keywords: Islamic banks, Home financing; Constructive possession, Diminishing balance, Compounding process (search for similar items in EconPapers)
JEL-codes: G20 K20 K40 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: How Islamic is the diminishing musharakah model used for home financing? (2016)
Working Paper: How Islamic is the diminishing musharkah model used for home financing? (2016)
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