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22 MIF© Monthly
SEPTEMBER 2008
tion shows that the bank merely acts as through the purchase agreement with contract” with the bank at the outset,
a financier rather than a vendor. the customer that does not involve thereby leaving the welfare of the peo-
the transfer of the name in the issue ple unprotected.
document of title to the property. The MMQ, on the other hand,
The buying lasts for a few ultimately culminates in ownership
seconds during the signing and, in of the property by the customer. The
At the heart practice, the selling back to the cus- bank participates as a financial partner,
tomer through the asset sale agree- whether in full or in part, and an agree-
of Islamic finance is ment is almost immediate. ment is signed between the customer
It has been argued that this (partner) and the bank that stipulates
the principle of risk ignores the Shariah principle of “al- each party’s share of the profits.
sharing. As such, the Ghorm bin Ghonm” (no reward with- The bank will then lease its
out risk), “Ikhtiar” (value addition or share of the property to the customer
concept of ‘al-bay’ effort) and “al-Kahraj bil Daman” (any under Ijarah. The share will be divided
benefit must be accompanied by liabil- into a number of equal units and the
(trade) is used because ity), thereby subjecting the BBA profit customer promises to buy the individ-
the profit from trading to riba. ual units periodically until all are taken
At the heart of Islamic finance up (the principle of “al-bay” under the
incorporates risk- is the principle of risk sharing. As such, MMQ contract).
the concept of “al-bay” (trade) is used The bank will then agree that
taking, while the because the profit from trading incorpo- the Ijarah rental is reduced in propor-
contractual profit rates risk-taking, while the contractual tion to the units purchased.
profit from loan transactions (riba) is The periodic payment by the
from loan risk-free. customer in this model constitutes
Many have observed that there two parts:
transactions (riba) is no risk-taking in the BBA financing a) a rental payment for the portion
is risk-free. and, hence, does not merit the concept owned by the bank; and
of al-bay. b) a buyout of part of that ownership.
In a BBA financing, the cus- In contrast to the leasing mod-
tomer is saddled with the burden of el, where the ownership of the financed
This is evident from the ac- paying off the property even before it is item remains with the lessor for the en-
quisition of the property by the bank completed as he has engaged in a “debt continued...
The structure of Musharakah Mutanaqisah
(iii)
(ii)
Customer Bank
Co-ownership
(i)
20% 80%
Property
i. The customer identifies the property, with 20% of the purchase price being paid by the customer and 80% by the bank. The customer
and the bank therefore own 20% and 80% of the property respectively.
ii. The customer uses the property as a residence and pays rent to the bank for the use of his share of the property.
iii. The bank’s share of the property is divided into 20 units of 4% each and the customer promises to buy one unit at the end of each year
for the next 20 years — at the end of which the customer fully owns the property and the rent is reduced in proportion to units bought
by the customer.
MIF© Monthly 23
SEPTEMBER 2008
article continued...
24 MIF© Monthly