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In our world nowadays, the contract of Al-Bay’ Bithaman Ajil (BBA) had always been used for long time duration of financing. For example, home financing. In Malaysia also, this concept is popular and it showed that at the Kuala Lumpur High Court alone, 90% of the 3,200 Muamalat cases registered between 2003 to 2009 concerns BBA . While the BBA is popular, it has proven to be quite unsatisfactory to the customers and bankers. That’s why Musharakah Mutanaqisah concept is being argued as a better contract than BBA for long time duration.


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  1. 1. MUSHARAKAH MUTANAQISAH BASED HOUSE FINANCING LEGAL ISSUES AND RECOMMENDATIONS Introduction In our world nowadays, the contract of Al-Bay‟ Bithaman Ajil (BBA) had always been used for long time duration of financing. For example, home financing. In Malaysia also, this concept is popular and it showed that at the Kuala Lumpur High Court alone, 90% of the 3,200 Muamalat cases registered between 2003 to 2009 concerns BBA1. While the BBA is popular, it has proven to be quite unsatisfactory to the customers and bankers. That‟s why Musharakah Mutanaqisah concept is being argued as a better contract than BBA for long time duration. What is Musharakah Mutanaqisah Concept? Musharakah Mutanaqisah is based on diminishing partnership concept. It consists of three contracts which are musharakah, ijarah as well as bay‟(sale). First, the customer enters into a musharakah under the concept of „Shirkat-al-Milk‟ (joint ownership) agreement with the bank to co-own the asset being financed. Second, the bank leases its share in the asset ownership to the customer under the concept of ijarah. This is when the customer pays a% of the asset cost as the initial share to co-own the asset whilst the bank provides for the balance of b%. Third, the customer gradually buys the bank‟s b% share at an agreed portion periodically until the asset is fully owned by the customer. The periodic rental amounts will be jointly shared between the customer and the bank according to the percentage share holding at the particular times which keeps changing as the customer purchases the financier‟s share. The customer‟s share ratio would increase after each rental payment due to the periodic redemption until eventually fully owned by the customer 1 Zakhiri, M. (2010, June 9). Musharakah Mutanaqisah Financing Facilities Legal Issues and Challenges. Islamic Finance News.(23)7.
  2. 2. Example of Musharakah: Financier 80% Customer 20% Musharakah 100% Musharakah Businesss The permissibility of the Musharakah is agreed by the majority of scholars. Most of them argue that there is no specific evidence in the Quran and Sunnah that prohibit the Musharakah Mutanaqisah. Allah states that if a person dies without leaving behind any ascendants or descendants; but he has brothers and sisters more than two in number; then they will share a third of the property of the mortal2. So, based on this verse the partnership of the property is legal in the shariah. Musharakah Mutanaqisah Documents: 1. Promise (Wa‟ad) 2. MM facility agreement (to set terms for the MM and MM business) 3. Sales & Purchase (S&P) (or supplemental S&P, if the customer himself has signed the S&P with the Vendor before approaching the bank for fi nancing) 4. Ijarah lease agreement 5. Trust deed (if applicable) 2 Surah An-Nisa, 4: 12
  3. 3. 6. Service agency agreement 7. Letter of undertaking Implementation of Musharakah Mutanaqisah In regards to the implementation of Musharakah Mutanaqisah, it found that there are some legal issues pertaining to this concept. It includes issues of rental rate, wa‟ad, damage of property, tax and land ownership and else (Osmani and Abdullah, 2005). But, there are still many rooms for improvement to make the Musharakah Mutanaqisah more Shariah compliant otherwise it is just a replication to the conventional loan. ISSUES Interest rate as rental rate The respective bank uses Islamic Bank Rate (IBR) with adjustment as the profit rate. The profit rate will be differing according to the financing amount and whether the property is already completed or under construction. For home financing range between RM 100 thousand to RM 500 thousand, the rate for the completed home will be IBR – 1.70% while for the under construction home, the rate is IBR – 1.60%. While for the home financing above RM 500 thousand, the adjustment rate is higher by 1% for both completed and under construction. The same goes to commercial property financing. The rate is different whether the amount of financing is RM 100 thousand below or above. For the completed property below RM 100 thousand, the rate is IBR – 1.30% while for under construction property, the rate is IBR – 1.20%. While for the financing amount above the RM 100 thousand, the adjustment rate is higher by 1% for both completed and under construction property.3 From here it seems that the bank still use conventional interest rate as a benchmark while if we follow the concept of Musharakah Mutanaqisah, the bank should use the rental rate. Besides that, as the IBR is based on Overnight Policy Rate of Bank Negara Malaysia, it may contains element of uncertainty as argued by Meera and Abdul Razak (2005) because the interest rate is fluctuating everyday and it may 3 Siti Fariha. (2013, March 6). An Evaluation On Musharakah Mutanaqisah Based House Financing By Islamic Banks In Malaysia. Retrieved 22 November 2013.
  4. 4. burdensome to the customer although the bank states that the profit rate is being capped at 10.25%.4 This benchmark will lead Musharakah Mutanaqisah to be similar with conventional financing contracts. Issue of property maintenance Customer has to bear the cost of maintenance and there is no clause in agreement between the bank and the customer which specifies the customer to bear the cost of maintenance. It is said to be done based on the mutual understanding between the customer and the bank. Furthermore, the bank asserts that since the legal title of the property is possessed by the customer, they are the ones that should be responsible for the maintenance. Besides that, the bank argues that it would be impractical for them to be in charge of maintenance works due to the nature of the bank‟s operation besides at the end of the contract, the customer will own the home or property. Issue of risk sharing between bank and customer By analyzing how this respective local Islamic bank implements the Equity Home/ Property Financing-i, it can be concluded that the bank do not bear any risk regarding the ownership of the home or property. The legal title of the home or property lies with the customer from the beginning of the contract and the bank just acts as a trustee. Thus, it can be inferred that the true concept of Musharakah does not exist here. The true concept of Musharakah acknowledges the joint ownership by both parties which are the customer and the bank. Secondly, in the case of the uncompleted home or property, if the home or property is found to be not completed, the bank will ask the customer to pay back the amount the bank has disbursed on the property. Again, it does not truly reflect the true concept of Musharakah whereby any loss should be borne by the both parties according to the capital contribution. Thus, it can be concluded the bank does not bear any „Iwad in implementation of this contract, merely acts as financier, more or less similar with conventional financing. 4 Meera, Ahamed Kameel Mydin and Abdul Razak, Dzuljastri (2005) “Islamic Home Financing through Musharakah Mutanaqisah and Al-Bay’ Bithaman Ajil Contracts: A Comparative Analysis”. Retrieved 22 November 2013.
  5. 5. Issue of charges and fees Through Non Free Acquisition Cost policy, the bank acquires the customer to pay the legal fees and all fees related to the acquisition costs upfront before the financing amount is granted. This is contrast with the concept of Musharakah Mutanaqisah whereby both parties should bear the legal fees and charges. As a matter of fact, AAOIFI Financial Accounting Standard on Musharakah Mutannaqisah required the financial expenses arise from the contract are borne by the partners in proportion to their shares. The same goes to the issue of maintenance as have been discussed above. Other issues In the process of implementing this contract, the respective local Islamic bank faces the problem in preparing the documentation of the contract due to the lack of the Shariah lawyers that are experts and well understand the Musharakah Mutanaqisah contract5. Besides that, there are many comments from their customers regarding the abolishment of Bai Bithaman Ajil and the replacement with Musharakah Mutanaqisah. Recommendations As a newly implemented product, Musharakah Mutanaqisah based contract is not excluded from having some flaws and limitations. However, there are still some rooms for improvements to make it a better product. Thus, collaboration from various parties and economic scholars is very important in improving Musharakah Mutanaqisah based contract to make it more Shariah compliant and assessable to all type of income group yet maintaining its commercial value Next, the bank considered as “Islamic” ought to be guided by the philosophies of Islamic business, which are, firstly, the philosophies will be used by the management or policy makers of the banks in the process of formulating corporate objectives and policies. Secondly, these philosophies serve as an indicator as to whether the particular Islamic bank is upholding true Islamic principles. The representatives should know these philosophies. Other than that, Islamic banking is a subset of the overall Islamic economic system. They must that strives for a just, fair and balanced society as envisioned and deeply inscribed in the objectives of Shariah. 5 ibid at 1
  6. 6. We believe that there is a bigger rooms for the Musharakah Mutanaqisah based financing contract to be further implemented by the banks because currently only nine banks has implemented Musharakah Mutanaqisah based financing contract which are RHB Islamic Bank, Kuwait Finance House, OCBC Al Amin, HSBC Amanah, Bank Muamalat Malaysia Berhad, Citibank, Affin Islamic Bank and Standard Charted Sadiq Islamic Bank. Thus, there is high opportunity for this Musharakah Mutanaqisah contract to grow and replace Bai Bithaman Ajil contract since the implementation of Bai Bithaman Ajil contract has been surrounded by many controversial issues and still being debatable among scholars. Conclusion In conclusion, it seems that Musharakah Mutanaqisah contract still in look like in conventional loan. A truly Islamic financing should avoid interest rates totally as such and let the values and payments solely be determined by the real economy. There also must be free of uncertainty in contract to prevent fraud/injustice from incurred.