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Article
Publication date: 2 January 2018

Alam Asadov, Zulkarnain Bin Muhamad Sori, Shamsher Mohamad Ramadilli, Zaheer Anwer and Shinaj Valangattil Shamsudheen

This paper aims to examine the practical issues in the Musharakah Mutanaqisah (MM) financing and subsequently, recommends possible solutions to mitigate these issues and improve…

2705

Abstract

Purpose

This paper aims to examine the practical issues in the Musharakah Mutanaqisah (MM) financing and subsequently, recommends possible solutions to mitigate these issues and improve the current practice.

Design/methodology/approach

This paper analyses the theory and current practices of MM offered by Islamic banks.

Findings

It is suggested that Islamic financial institutions consider revaluation of property’s value to its fair value, especially during termination of MM contract and annual or agreed periodic review of the market value of the assets to determine the “rental” payments by the customer. It is also recommended that Islamic financial institutions should share all associated costs in performing the contract.

Research limitations/implications

Research findings reported in this paper contribute to the body of knowledge on MM in general and to the Islamic finance practices in Malaysia and abroad. Indeed, the Malaysia Central Bank (i.e. Bank Negara Malaysia) should form a special committee to look into the issues highlighted in this paper and recommend strict guidelines for Islamic financial institutions to improve their practices.

Practical implications

Islamic banks should extend the use of MM contract in automobile and trade financing where rent or profit could be easily identified and value of the asset is more certain. The regulators and Islamic financial standard setting authorities need to oversee the Shari’ah board decisions on MM contracts and keep the gates in the interest of ensuring a more viable and authentic Islamic finance industry.

Originality/value

This paper briefly views the current mode of MM contracts, specifically for home financing, and highlights the incompliance to Shari’ah requirements in exercising these contracts in practice.

Details

Journal of Islamic Accounting and Business Research, vol. 9 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

Open Access
Article
Publication date: 19 June 2018

Norbaizurah Abdul Jabar, Razli Ramli and Sazali Abidin

In Malaysia, both Islamic financial institutions (IFIs) and Islamic co-operatives (ICs) provide mushārakah mutanāqiṣah (diminishing partnership) (MM) financing. It was initially a…

3046

Abstract

Purpose

In Malaysia, both Islamic financial institutions (IFIs) and Islamic co-operatives (ICs) provide mushārakah mutanāqiṣah (diminishing partnership) (MM) financing. It was initially a preferred contract as it is deemed to be more Sharīʿah-compliant and free from the element of ribā (interest) in comparison to other Sharīʿah-compliant sale contracts. Nevertheless, MM is now considered less appealing to IFIs due to its existing challenges. This paper aims to emphasise on MM as practiced by ICs which will highlight approaches to default, pricing of rental rates, profit sharing method and early settlement which differ to the practice of MM by IFIs.

Design/methodology/approach

This study focuses on Koperasi Pembiayaan Syariah Angkasa (KOPSYA), an IC based in Malaysia, which the authors concurred as being an ideal organisation to study on the matter due to its strong stance in promoting Sharīʿah-compliant financing products.

Findings

The research highlights the flexibility of MM implementation in KOPSYA to provide some insights on the rationale behind MM operations in KOPSYA.

Originality/value

The authors are hopeful that this paper will aspire further interest by giving the readers better understanding on the implementation of MM in KOPSYA and how it will benefit the customers.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 1
Type: Research Article
ISSN: 0128-1976

Keywords

Article
Publication date: 30 August 2011

Edib Smolo and M. Kabir Hassan

The main purpose of this paper is to provide a comprehensive review of mushārakah mutanāqisah (MM; diminishing partnership) technique and its potentials for Islamic financial…

15782

Abstract

Purpose

The main purpose of this paper is to provide a comprehensive review of mushārakah mutanāqisah (MM; diminishing partnership) technique and its potentials for Islamic financial institutions.

Design/methodology/approach

Based on an extensive literature review, this paper aims to highlight, explain and discuss the basic principles underlying implementation of MM and its distinctive features when compared to other modes of finance.

Findings

Islamic banks, throughout the years, developed several modes of finance which are more or less similar to their conventional counterparts. In fact, al‐Bayc bithaman al‐ājil (BBA) and murābahah are the two instruments most commonly used by Islamic banks and financial institutions. Investment and financing through the profit and loss sharing instruments is almost nonexistent within the Islamic financial system. MM technique is an alternative financial instrument available for Islamic banks. It is a relatively new and very little used product available for Islamic banks. The paper claims that MM is more in line with Shari'ah teachings and as such should be used more by Islamic financial institutions. The study indicates that MM possibly has a comparative advantage for both financier and the customer when compared with conventional loans and BBA.

Research limitations/implications

As a relatively new and untested mode of finance, the paper offers a theoretical overview only. Further studies should discuss more practical issues that keep banks away from utilizing MM more efficiently.

Originality/value

The comprehensive overview of the MM and underlying issue discussed in this paper is a very good foundation for further studies on the topic. It gives a clear theoretical base for practical implementation of MM.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 4 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 15 February 2021

Nik Abdul Rahim Nik Abdul Ghani, Ahmad Dahlan Salleh, Amir Fazlim Jusoh @ Yusoff, Mat Noor Mat Zain, Salmy Edawati Yaacob, Azlin Alisa Ahmad and Muhammad Yusuf Saleem

This paper critically aims to examine the concept of beneficial ownership and its application in musharakah-based home financing.

Abstract

Purpose

This paper critically aims to examine the concept of beneficial ownership and its application in musharakah-based home financing.

Design/methodology/approach

The study applies the method of juristic interpretation in analyzing the meaning of beneficial ownership in legal documentation of musharakah-based home financing. This qualitative study uses content analysis approach that investigates the works of Islamic scholars on the concept of ownership and evaluates the concept of beneficial ownership in musharakah-based home financing from the Islamic perspective.

Findings

The result finds that beneficial ownership is considered a true ownership, as Shari’ah allows the transfer of ownership based on the offer and acceptance in a contract. Furthermore, the absence of legal registration does not mean the absence of true ownership, whereas all documentations and agreements have clearly stated rights and liabilities of each contracting parties.

Originality/value

This paper provides a fiqhi discussion of analyzing beneficial ownership in musharakah-based home financing. It shows that Shari’ah parameters are essential for the use of beneficial ownership to ensure its compliance with the Shari’ah requirements of milkiyyah (ownership).

Details

Qualitative Research in Financial Markets, vol. 13 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Book part
Publication date: 20 January 2022

Alam I. Asadov

The majority of economic crises impact the wealth of people which in turn affect their financial capacity to purchase residential properties. However, the home financing method…

Abstract

The majority of economic crises impact the wealth of people which in turn affect their financial capacity to purchase residential properties. However, the home financing method may also have an impact on the behaviour of house prices. This chapter intends to test argued resilience of Islamic finance to situations of financial crisis by using an Islamic home financing product called Enhanced Musharakah Mutanaqisah (EMM) which was proposed by Asadov and Ibrahim (2018) as an example and compare its performance to conventional mortgage. Two different models of home financing, conventional and EMM based ones are developed with the former reflecting basic features of conventional mortgage and the latter using rental rates and house price indices for product pricing. Both models are compared using aggregate data for the US housing market for the past 30 years in order to demonstrate the resilience of the EMM model. The findings of the study show that EMM is more flexible in terms of reflecting real situations in both the housing market and aggregate economy as compared to the conventional model. Its pricing is more accommodating particularly during times of economic downturns, and it can potentially provide the solution to numerous mortgage defaults arising from such conditions. Despite the proposed models being tested using data only from the United States, the analysis can be generalized for other countries as well. The implementation of the EMM model, as an example of Shariah-based Islamic financial product, is expected to bring fairness and justice in the relationship between financial institutions and its clients. To the best of our knowledge, this is the first attempt of simulating a Musharakah Mutanaqisah based home financing using both actual rental rates and house prices for product pricing.

Article
Publication date: 2 May 2017

Hasnan Baber

This paper aims to provide comprehensive review of Islamic housing finance models. The paper provides detailed mechanism and solution to contemporary issues of these models..

1020

Abstract

Purpose

This paper aims to provide comprehensive review of Islamic housing finance models. The paper provides detailed mechanism and solution to contemporary issues of these models..

Design/methodology/approach

This paper is conceptual in nature. Based on an extensive study of literature, this paper explains working of two Islamic models al-Bay’ Bithaman Ajil (BBA) and the Musharakah Mutanaqisah (MM) with hypothetical examples.

Findings

It was revealed in the study that BBA is just convergence of conventional housing finance and does not fall in line with shariah regulations. MM approach is a relative new concept and strictly following shariah guidelines. MM approach is based on welfare for all rather than profit for few. There were some issues spotted with MM model when implemented on the ground, and hence this study came up with solution to such issues.

Research limitations/implications

This paper cannot be tested until the models are practically applied. This MM contract is new and will take some time to be accepted by customers, but its reliability promises it..

Originality/value

This study is original and new, as it finds BBA not permissible which no other study has concluded so far. Also issues in these models, and their solutions were studied first time.

Details

Qualitative Research in Financial Markets, vol. 9 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 20 January 2020

Aishath Muneeza, Muhammad Fahmi Fauzi, Muhammad Faisal Bin Mat Nor, Mohamed Abideen and Muhammed Maher Ajroudi

The purpose of this paper is to find out the existing practices of the Islamic banks in providing financing to the customers who have a requirement to purchase a finished property…

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Abstract

Purpose

The purpose of this paper is to find out the existing practices of the Islamic banks in providing financing to the customers who have a requirement to purchase a finished property and to examine the existing products used by the Islamic banks in this regard by providing an insight into the modus operandi of these products. In doing this, attempt is made to find out the most famous product offered by the Islamic banks in this regard and to find out whether in reality, Malaysian Islamic banking industry has moved away from Bai Bithaman Ajil (BBA) or not.

Design/methodology/approach

This is a qualitative research, largely library-based, and it will consist of secondary sources such as books, journals, articles and other sources related to the Islamic house financing in Malaysia for finished properties. Recent information of the practises of the banks in this regard is obtained from the official websites of the banks.

Findings

It is found from this study that majority of Islamic Banks in Malaysia prefer to use the Commodity Murabahah facility for finished property. This finding contradicts with the observations made by some scholars who state that in Malaysia, BBA was initially used, and nowadays, the use of Musharakah Mutanaqisah is more common. The reason why Commodity Murbahah has gained popularity is because of the fact that via the Bursa Suq Al Sila platform, it is easy, swift, reliable, profitable, cheaper, convenient and has zero risk to do this type of transaction at the comfort of the office. It is recommended in this paper to use Musharakah Mutanaqisah, as this contract is an innovative contract that is classified as an equity contract under shariah where risk is shared between the parties. There is need to conduct further research to implement Musharakah Mutanaqisah in Malaysia, specifically to reduce the risk that Islamic Banks will bear by practicing this contract.

Originality/value

The findings of this paper might create confusion among readers, as some may perceive that the finding of the paper is not new as BBA has been dominating Islamic house financing industry from the inception of Islamic banking in the country, and BBA and Murabahah are similar in nature, and as such, commodity Murabahah is also a Murabahah transaction. The reality that needs to be understood is that the way BBA was or is practised in Malaysia in relation to Islamic house financing is that in the name of BBA, the transaction actually followed the Bai’ ‘inah contract, which is a controversial contract among the shariah scholars. Likewise, commodity Murabahah is also a different contract than Murabahah, as it actually refers to tawarruq. As such, this research finding is important to the Islamic banking industry to understand that Malaysia has moved away from the Bai’ ‘inah contract practised in the name of BBA in Islamic house financing, and there are new products introduced by the Islamic banks in Malaysia to replace this practice which were criticised by Shariah scholars.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 15 August 2016

Rosylin Bt Mohd Yusof, Akhmad Affandi Mahfudz, Ahmad Suki Che Mohamed Arif and Nor Hayati Ahmad

This paper aims to propose a new pricing alternative called Rental Rate Index (RR-I) that captures the true value of property to be used by Islamic banks in Musharakah Mutanaqisah

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Abstract

Purpose

This paper aims to propose a new pricing alternative called Rental Rate Index (RR-I) that captures the true value of property to be used by Islamic banks in Musharakah Mutanaqisah (MM) contract for home financing.

Design/methodology/approach

By formulating a profit rate based on Rental Index (RI) and House Price Index (HPI), the proposed rate eliminates conventional profit rate benchmarking, and, at the same time, suggests a fair, equitable and sustainable financing. This new RR-I (measured by RPI/HPI) enables computerization of the MM system in home financing to be easily implemented. A financial simulation is developed to demonstrate the feasibility of this newly proposed rate.

Findings

This newly proposed RR-I is found to be more stable, having less fluctuations, resilient to macroeconomic conditions and yet comparable to the conventional interest rates, without depending on them. It can also be regarded as a rate that is fair and sustainable to both the customer and the bank, as it measures the actual rate of return to both parties in MM contract.

Research limitations/implications

The paper confines one contract, namely, MM, as it is claimed to be more Shariah-compliant than others.

Practical implications

The finding also sheds some light on the recommendation by Bank Negara Malaysia, which is to consider RR that is more indicative of the actual rental price while taking into account the competitiveness of the product. (BNM, 2007).

Social implications

This paper wreaks customer patronage in selecting the contract of home financing.

Originality/value

This paper attempts to resolve the issue of benchmarking RR to the conventional interest rate in the MM contract. Studies conducted on this issue via simulation approach are meager.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 9 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

Open Access
Article
Publication date: 16 October 2018

Mohd Zaidi Md Zabri and Mustafa Omar Mohammed

This study aims to validate a potential synergistic venture between cash waqf (Islamic endowment) institutions (CWIs) and financial cooperatives (FCs) in the provision of…

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Abstract

Purpose

This study aims to validate a potential synergistic venture between cash waqf (Islamic endowment) institutions (CWIs) and financial cooperatives (FCs) in the provision of affordable Islamic home financing (IHF) in Malaysia.

Design/methodology/approach

The study adopted semi-structured interviews with ten experts to validate the cash waqf-financial-cooperative-mushārakah mutanāqiṣah (CWFCMM) model. Thematic analysis technique was used to analyse the verbatim texts.

Findings

The findings show that the majority of the informants have positive perceptions of the potential of the CWFCMM model to provide financially affordable IHF products in Malaysia. Nevertheless, this study sheds light on the varying degrees of latent issues and challenges that might arise in the implementation of this model. For example, FCs need to practice the correct business model, implement good governance structures and employ the right people. Meanwhile, CWIs need to work on their accountability issues by publishing their audited accounts in mainstream newspapers, much like what is being done by non-governmental organisations such as the widely recognised Malaysian Medical Relief Society (MERCY Malaysia).

Research limitations/implications

This study interviewed a small, industry-specific number of informants in generating its findings. Time and budget constraints are some of the limiting factors in carrying out the study. Because of these factors, the generalisation of the study’s findings will be limited.

Practical implications

First, the CWFCMM model offers an alternative, financially affordable IHF instrument to low- and middle-income households in Malaysia. Second, the involvement of third-sector institutions such as FCs and CWIs in the provision of IHF will reduce the burden of the government in its spending on home financing solutions for civil servants. Third, this model will harness the potential of waqf-based financing beyond the contemporary limited applications to mosques, graveyards and taḥfīẓ (Qurʾan memorization) schools.

Originality/value

This study presents an alternative IHF model that transcends the current institutional framework that is heavily dominated by Islamic commercial banks and government-owned home financing institutions. The study does not focus on a single third-sector institution but on an integration of at least two of them, CWIs and FCs, in implementing the IHF model.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 2
Type: Research Article
ISSN: 0128-1976

Keywords

Article
Publication date: 2 May 2017

Kevin Loke Ke Wei and Hassanudin Mohd Thas Thaker

The purpose of this paper is to explore the development of Islamic home financing and some of its practical issues. In addition, the study also intends to draw attention to some…

1794

Abstract

Purpose

The purpose of this paper is to explore the development of Islamic home financing and some of its practical issues. In addition, the study also intends to draw attention to some recommendations to the issues highlighted from the viewpoint of industrial experts.

Design/methodology/approach

The methodology for this study follows the qualitative research approach which aims to capture the thoughts and extensive knowledge of a few related experts in the field. Eight respondents who are mainly scholars and bankers in Islamic banking were selected for the interview purpose. A semi-structured interview was adopted to investigate a series of themes concerning the Islamic home financing in Malaysia.

Findings

In terms of development, the findings showed that a majority of the participants agreed that the Islamic banking and finance (IBF) is developing in line with its counterpart – the conventional banks. This is due to its innovation in products as well as offering a variety of financial products including home financing. Some of the practical issues highlighted by the respondents include pricing, adherence to conventional framework and interest rate movement. Islamic home financing is argued to be much more expensive and faces difficulty in working within a conventional framework. The issue of interest rate movement is also becoming a major hurdle in Islamic banking due to the absence of a proper benchmark for IBF. At present, IBF still follows the benchmark set by its conventional counterpart. Furthermore, the respondents also believed that the product of home financing, together with other financial products, are not in line with the teaching of Shariah principles and guideline. In addressing those issues, the respondents provided some suggestions to counter those problems, which include promoting Islamic home financing, particularly in terms of Musharakah Mutanaqisah (MM), ensuring the transparency of products, strengthening due diligence, legal aspect and others.

Research limitations/implications

This study is limited in terms of the relatively small number of respondents used to generate its findings. Time constraint is another limiting factor of the research. Additionally, potential respondents in a higher position were unable to take part in the study. Due to these factors, the generalisation of the study’s findings will be visibly restricted.

Practical implications

This paper is expected to generate several practical implications. Firstly, the study’s exploration of the issues surrounding home financing will likely provide a general overview of the recent development in Islamic banking and the challenges it faces. Consequently, this will indirectly help policymakers and bankers alike to design a better policy when dealing with Islamic home financing issues. In the review of various literatures in the field, a majority of research studies were observed to mainly focus on a quantitative approach. Hence, in terms of methodological innovation, the study’s use of qualitative inquiry based on an interview method may provide a deeper understanding of the matter. The resolutions proposed by the various experts are hoped to contribute to shaping a better framework and system in Islamic and conventional home financing in Malaysia.

Originality/value

Despite having many literatures revealing mixed results concerning Islamic home financing, especially the Bai Bithaman Ajil and MM, addressing the issues of Islamic home financing, particularly from an expert perspective, has been lacking. The majority of research studies claim those issues from a theoretical viewpoint rather than a practical one. With this gap and lack of initiative, the current study is motivated to undertake an in-depth analysis on the issues of Islamic home financing and how to address those arising issues from an industrial expert’s point of view via a qualitative approach.

Details

Qualitative Research in Financial Markets, vol. 9 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

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