Islamic financial institutions have submitted a proposal to offer a property financing product based on the concept of musharakah mutanaqisah. Basically, the modus operandi of the property financing product based on musharakah mutanaqisah, is as follows:
- The customer who wants to buy a property approaches the bank for financing;
- The bank and the customer enter into a musharakah agreement, to jointly purchase the property, based on an agreed share, depending on the amount of financing requested (for example 90:10);
- The deposit already paid by the customer will be deemed as his initial share contribution;
- The customer will rent the bank’s shares of the jointly acquired property through an ijarah agreement; and
- The instalment by the customer will be used to buy the shares of the bank gradually, until the entire bank’s share is owned by the customer.
A Shari’ah issue arising from the above transaction is the combination of musharakah and ijarah in one document of agreement. This combined transaction may be perceived as having two sales in one sale contract (bai`atain fi al-bai`ah), which is prohibited in the Shari’ah.
The Council, in its 56th meeting, held on 6th February 2006 / 7th Muharram 1427, resolved that the financing product structured based on musharakah mutanaqisah contract is permissible. This is because musharakah mutanaqisah is a contract recognized in Islamic muamalat. In implementing a musharakah mutanaqisah contract, it is permissible for the contracting parties to:
- Combine the two contracts of musharakah and ijarah in one document of agreement, as long as both contracts are concluded separately and clearly not mixed between each other; and
- Impose a pledge on the shares owned by the customer, because the right of beneficial ownership is recognized by the Shari’ah.
Issuer: Shariah Advisory Council, Central Bank of Malaysia