ISSUES AND CHALLENGES IN MUSHARAKAH MUTANAQISAH HOME FINANCING IMPLEMENTATION: A NARRATIVE REVIEW

Abstract

The need for Shariah-compliant alternatives to conventional debt-based financing has resulted to a significant growth of the Islamic banking and finance industry. For financing of real estate properties, Musharakah Mutanaqisah, or diminishing partnership, has been identified as an equity-based alternative that is theoretically superior to replace the controversial Bay’ Bithaman Ajil (BBA) contract. Although Musharakah Mutanaqisah is theoretically aligned with Maqasid al-Shariah (objectives of Shariah) and profit and loss sharing (PLS) principle, challenges exist in its practical implementation by Islamic Financial Institutions, particularly in terms of Shariah-compliance, operational, and legal challenges. The literature on Musharakah Mutanaqisah home financing in Malaysia and other jurisdictions is visited in this narrative review. Discerning issues on Musharakah Mutanaqisah include the usage of purchase undertakings (Wa’ad), usage of conventional interest rates as the benchmark for the rental rates, skewed risk and cost allocations, and the complexities of financing uncompleted properties under the National Land Code 1965. This research investigates the reluctance of Islamic financial institutions to use Musharakah Mutanaqisah in structuring their products, as shown in the practice by institutions like Maybank Islamic, Affin Islamic Bank, and few other Islamic financial institutions in Bahrain. To address these structural flaws, this research assesses other alternatives, such as the cooperative models (Ta'awun), hybrid crowdfunding, and Islamic Rental Rate (RRi). A comprehensive regulatory harmonisation, property laws reform, and a radical and fundamental change toward a genuine equity-based financing are proposed to ensure the sustainability and authenticity of Islamic home financing.