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

Zubair Hasan

MPRA Paper from University Library of Munich, Germany

Abstract: 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 sothat 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: slamic 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: 2016-06, Revised 2016-08
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Turkish Economic Review 3.3(2016): pp. 443-452

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/74762/1/MPRA_paper_74762.pdf original version (application/pdf)

Related works:
Journal Article: How Islamic is the Diminishing Musharkah Model used for Home Financing? (2016)
Working Paper: How Islamic is the diminishing musharakah model used for home financing? (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:74762

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().