The Potentials of mushārakah mutanāqisah for Islamic Housing Finance

International Journal of Islamic and Middle Eastern Finance and Management, Vol. 4 No. 3, 2011, pp. 237-258

Posted: 7 Nov 2018

See all articles by Edib Smolo

Edib Smolo

International Shari’ah Research Academy for Islamic Finance (ISRA)

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: 2011

Abstract

Purpose – The main purpose of this paper is to provide a comprehensive review of musharakah mutanaqisah (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-Bay bithaman al-ajil (BBA) and murabahah 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.

Keywords: Islamic finance, Shari’ah-compliant, Musharakah mutanaqisah, Banks, Equity capital financing

Suggested Citation

Smolo, Edib and Hassan, M. Kabir, The Potentials of mushārakah mutanāqisah for Islamic Housing Finance (2011). International Journal of Islamic and Middle Eastern Finance and Management, Vol. 4 No. 3, 2011, pp. 237-258, Available at SSRN: https://ssrn.com/abstract=3264368

Edib Smolo

International Shari’ah Research Academy for Islamic Finance (ISRA) ( email )

Kuala Lumpur, 59100
Malaysia

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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