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

Author

Listed:
  • Hasan, Zubair
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.

Suggested Citation

  • Hasan, Zubair, 2016. "How Islamic is the diminishing musharakah model used for home financing?," MPRA Paper 72272, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72272
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    File URL: https://mpra.ub.uni-muenchen.de/72272/1/MPRA_paper_72272.pdf
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    References listed on IDEAS

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    1. Hasan, Zubair, 2013. "A critique of the Diminishing Balance Method of Islamic home financing - Response," MPRA Paper 43684, University Library of Munich, Germany.
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    Cited by:

    1. Reazul Islam & Rubi Ahmad, 2020. "Applicability of Mudarabah and Musharakah as Islamic Micro-equity Finance to Underprivileged Women in Malaysia," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 32(1), pages 176-197, January.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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