How Islamic is the diminishing musharakah model used for home financing?

Zubair Hasan

MPRA Paper from University Library of Munich, Germany

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 is cleared off in full. Islamic banks have followed suit using EMI on diminishing musharakah partnership basis. The model is popularly known as the MMP abbreviating its Arabic nomenclature. The defining character of this model is increasing amortization of capital through a customer buy back provision in the agreement. I 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 lower rate than the rate of capital amortization until the contract is concluded. This paper provides additional evidence and documentation to reinforce the contention that on both counts the MMP violates Shari’ah requirements and may be replaced with the model we propose to escape the non-compliance; there are additional advantages as well.

Keywords: Home financing, law and economics; Islamic baking, Shari’ah permissibility Home financing, law and economics; Islamic baking, Shari’ah permissibility Home financing, law and economics; Islamic baking, Shari’ah permissibility Home financing, law and economics; Islamic baking, Shari’ah permissibility Home financing, law and economics; Islamic baking, Shari’ah permissibility hOME FINANCING; Law and economics, Islamic banks, Shari'ah admissibility; constructive possession (search for similar items in EconPapers)
JEL-codes: G2 M21 (search for similar items in EconPapers)
Date: 2016-07-14
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: How Islamic is the Diminishing Musharkah Model used for Home Financing? (2016)
Working Paper: How Islamic is the diminishing musharkah model used for home financing? (2016)
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