Diminishing Musharakah Home Finance
Question
We are looking to purchase a house and have approached _____ Islamic Finance.
Please see attached a broacher of the modus operandi that they utilise.
Kindly advise if it is OK?
ISLAMIC BANKING RESIDENTIAL PROPERTY FINANCE DIMINISHING MUSHARAKA
Islamic Banking in _____ = 12 years
Why the need? Islamic Law [Shariah] prohibits the use of “INTEREST”
SHARIAH, Arabic: شريعة = LAW – Religious legal system that governs the members of the Islamic Faith
Residential Property Finance is based on “Musharaka” = PARTNERSHIP
Based on principle of SHARING RISK
Residential Property Finance = SALES AGREEMENT
Acquisition or refinance of Immovable Property
DM- DIMINISHING MUSHARAKA
Why must the property be registered in the clients name first?
Shari’ah law prohibits the sale of property by someone who does not own it.
After registration:
– Property in Client’s name.
– Client will sell to _____ the right to transfer portion of the undivided share in Property to the Bank.
– _____ will sell a portion of it’s shareholding back to Client.
– Payment for the value of the portion sold to Client in year 1 is payable over a period of 1 year.
– The purchase price (“capital”) advanced by _____ is apportioned over the life of the DM in a manner similar to repayment of capital lent to a client by way of a term loan.
PRE-PAYMENTS & RE-ADVANCES & LUMP SUMS
Only done once a year when the annual “re-contracting” process takes place.
Prepayments
Upon prepayment, Client offers to pay more than the agreed monthly capital and profit rate payment in exchange for acquiring more than the agreed portion for the next year from _____.
Re-advances
Upon requesting a re-advance, Client offers to sell a portion of the undivided share in Property, already acquired from _____, back to _____ in exchange for further funding.
Lump Sums
Client may add a lump sum – acquires a greater share and reduces the capital amount.
SETTLEMENTS & CANCELLATIONS
Requests received from client
Settlements & Cancellations are routed via the PBHL service suite
Settlement amount is calculated based on profit charged for the year on annual sale of Banks Interests
Bank is allowed to recoup the full profit for the year or waive a portion
_____ Islamic approval required to waive a portion of profit
Client is allowed to cancel or settle at any point of deal and does not need to wait for annual review
Answer
We do not approve of the diminishing Musharaka agreement from Islamic financing. Various clauses and terms used in the documents indicate towards the agreement being a loan from _____ but the contract is being referred to as a ‘diminishing partnership.’
Also, _____ is required to purchase the property directly from the seller since they are buyers (financing the project) yet they state in the documents that the property must be in the clients name first as Shariah law prohibits the sale of property by someone who does not own it. In actual fact the bank owns the property and they then start selling portions of the property to you and their portions of the partnership gradually diminish based on the amount purchased by you, yet they are treating you as the buyer and you in turn are required to sell a portion of the property to them.
It seems that the concept of diminishing partnership hasn’t been correctly understood in the light of Shariah hence we advise abstention. It will be better for you to get some family member or some wealthy trustworthy businessman to purchase the house directly from the seller, and sell it to you in fixed terms over a fixed period of time (which will include a profit).
- Approved by
- Mufti Muhammed Saeed Motara Saheb D.B.
Fatawa SA is an independent, read-only index of fatawa already published by Darul Ifta, Darul Uloom Azaadville. It is not a fatwa service. For your own situation, ask the issuing Darul Ifta directly.