Generalized Formulae for Islamic Home Financing through the Musharakah Mutanaqisah Contracts

Year 2012, Volume: 1 Issue: 1, 126 - 133, 01.06.2012

Abdullah Eroğlu Şeref Kalaycı Hayrettin Usul

Abstract

The origin of Musharakah is an Arabic term which signifies the sharing of an item. In the system of Musharakah, all parties share the profit or loss in a joint enterprise. It arose as an ideal alternative for interest-based financing systems for both the production and service sectors (Usmani, 1999). The model of Musharakah Mutanaqisah Partnership (MMP) is an interest-free financing model in which capital is not permanent and every repayment of capital by the entrepreneur will diminish the total capital ratio for the capital provider. When the capital ratio for the capital provider declines to zero, the entrepreneur becomes the sole owner for the business (Abdul Rahman, 2007). Generally, the MMP models are related to home financing and repayments are constant. In this study, general formulae are derived for the case in which repayments occur as a linear-gradient series for the MMP model. In addition, an illustrative exampleis presented

Keywords

Musharakah, Mutanaqisah Partnership, Home Financing, Interest-free Mortgage

References

• Abdul Rahman, Abdul Rahim. (2007). “Islamic Micro Finance: A Missing Component in Islamic Banking”. Kyoto Bulletin of Islamic Area Studies, 1-2, 38-53.
• Abidin, S. Z., A. Md. Nassir and P. F. F. Khoderun, Musharakah Mutanaqisah: A So- lution To Different Interpretations By Malaysian and Middle East Scholars in Islamic Financing. http://academic-papers.org/ocs2/session/Papers/C8/514-698- 1-RV.doc.
• Eroğlu, A., Kalayci, S., Özdemir, G. and Çetin, A. C. (2010). “Generalized Formulae for the Shared Equity Home Financing Model”. The Journal of Faculty of Economics and Administrative Sciences, Suleyman Demirel University, 15(1), 1-10.
• Greco, Jr., T. H. A Shared Equity (Halal) Mortgage: How Does It Compare With A Conventional Mortgage? http://www.appropriate-economics.org/materials/tom_ greco_ globalization_money_trade.pdf.
• Hijazi, S. T. and M. Hanif. (2009). “Islamic Housing Finance: A Critical Analysis and Comparison with Conventional Mortgage”. Middle Eastern Economic sand Finan- ce, http://ssrn.com/abstract=1483524.
• Matthews, R., Tlemsaniand A. Siddiqui, Islamic Finance. http://www.nzibo.com/IB2/ IF_RIA.pdf.
• Meera, A. K. M. and D. A. Razak, (2005). “Islamic Home Financing through Mushara- kah Mutanaqisahand al-Bay’ Bithaman Ajil Contracts: A Comparative Analysis”, Review of Islamic Economics, 9(2), 5-30.
• Meera, A. K. M. and D. A. Razak, (2005). “Islamic Home Financing through the Mush- arakah Mutanaqisah Contracts: Some Practical Issues”, JKAU: Islamic Econ., 22(1), 121-143.
• Rammal, H. G. (2004). “Financing Through Musharaka: Principlesand Application”, Business Quest. http://ssrn.com/abstract=1442430.
• Siswantoro, D. and H. Qoyyimah, “Analysis on theFeasibilityStudy of MusharakahMu- tanaqisahImplementation in IndonesianIslamicBanks”, http://islamiccenter.kaau. edu.sa/ 7iecon/Ahdath/Con06/_pdf/Vol1/5%20Dodik%20Siswantoro%20-%20 Hamidah%20Analysis. pdf.
• Usmani, Muhammed Taqi, (1999). “The Concept of Musharakah and Its Application as an Islamic Method of Financing”, Arab Law Quarterly, 203-220. Appendix