Musharakah Mutanaqisah
Musharakah mutanaqisah is a diminishing partnership: a financier and a customer co-own an asset, the customer pays rent for using the financier's share and gradually buys that share until it owns the asset outright.
Also called: diminishing musharakah · diminishing partnership · declining balance co-ownership
It is the structure behind much Islamic home finance. The bank and the customer buy the property together, often with the bank holding most of the equity. The customer occupies it and makes monthly payments that combine two elements: rent for the portion still owned by the bank, under an ijarah, and the purchase of further units of the bank's share. As the bank's share falls, so does the rent.
The rent can be reviewed periodically, which is how these products track market rates. Because ownership is genuinely shared, questions of who bears major repairs, insurance and loss if the property is destroyed have to be allocated in line with ownership, not simply passed to the customer.
In practice
The bank's units must be bought at a price agreed at the time of each purchase, or at a market or agreed valuation, rather than guaranteed at the original cost regardless of what happens to the asset. That point is where diminishing musharakah products are most often criticised.
Example
A buyer puts down US$100,000 and a bank US$400,000 on a US$500,000 home. Each month the buyer pays rent on the bank's 80 per cent share plus an amount that buys back part of it. After ten years the bank's share has fallen to 40 per cent and the rent is calculated on that.
Commonly confused with
| Term | How it differs |
|---|---|
| Conventional mortgage | In a mortgage the buyer owns the home and owes the lender money secured on it. In diminishing musharakah the financier is a co-owner until it has been bought out. |
See also
- MusharakahMusharakah is a partnership in which each party contributes capital to a venture. Profit is shared at an agreed ratio, while losses are borne in proportion to each partner's capital contribution.
- IjarahIjarah is an Islamic lease: the owner of an asset transfers the right to use it for an agreed period in return for rent, while keeping ownership and the risks that come with ownership.
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.