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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).

Checked and Approved By:

Mufti Muhammed Saeed Motara Saheb D.B.

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