LAW 551 – BANKING LAW AND PRACTICE II:

CHAPTER REVIEW

PREPARED BY:

JEEVA RACHELUSUN PRAGAS

2020470902

LAWB06A

PREPARED FOR:

DR. SYUHAEDA AENI BINTI MAT ALI

FACULTY OF LAW UITM SHAH ALAM

PREAMBLE

This paper will discuss a review of Chapter 3 from Islamic Banking in Malaysia: Laws
Applicable to Musharakah Mutanaqisah Home Financing by Syuhaeda Aeni Binti Mat Ali,
Rusni Hassan and Ahmad Azam Othman.

As a preface, this book consists of 7 chapters; for the purpose of this paper, we will be
focusing on Chapter 3. Chapter 3 is titled: Musharakah Mutanaqisah Home Financing in
Malaysia. This chapter is further divided into 5 sub-topics, the introduction, the concept of
Musharakah Mutanaqisah, the structure of Musharakah Mutanaqisah home financing,
practices and operation of Musharakah Mutanaqisah home financing in Malaysia and a
conclusion.

1. INTRODUCTION

To first understand what Musharakah Mutanaqisah Home Financing is, this chapter
helps explain its terminology. Musharakah refers to partnership, Ijarah refers to lease and
lastly, Bai means sale. The Cambridge dictionary defines home financing as the activity of
providing money for people to buy property1. Conventionally, this refers to loans offered by
financial institutions such as banks to customers, where the bank pays the amount upfront, and
the customer pays back the loan on a deferred basis. However, conventional banking is subject
to interest rates, especially high ones, for housing loans, which we know is forbidden in Islam.
This chapter explains the Islamic approach to Home Financing.

Firstly, it defines Musharakah Mutanaqisah Home Financing as a hybrid contract

between a customer and an Islamic Financial Institution (IFI) that consists of Musharakah,
Ijarah and Bai. Essentially in Musharakah Mutanaqisah Home Financing a customer and IFI
enter into a Musharakah to jointly purchase an asset, such as a home or property, based on a
determined share agreed by between parties that is dependent on the amount the amount of
financing requested by the customer. Similar to conventional housing loans, the customer pays
a deposit as well, which in Musharakah Mutanaqisah Home Financing is considered his intnial
share of ownership which based on Conveyancing laws is often 10%. From this it can be
inferred that in most Musharakah Mutanaqisah Home Financing the customer holds 10% and

1
Cambridge Dictionary. (2023, July 19). home financing. @CambridgeWords.
https://dictionary.cambridge.org/dictionary/english/home-financing

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the bank holds a share of the remaining 90% of the asset. Once this is established, Ijarah comes
to play, where the IFI will “lease” its share to the customer where gradually over time, the
customer’s deferred payment will amount to a full purchase of the shares held by the IFI in the
joint purchase of assets.

The chapter also briefly mentioned the history of Musharakah Mutanaqisah where it
was actually first known as a co-ownership financing technique, and only in 1991, it was
approved for house financing as well. One very unique part of the introduction is how it
described Musharakah Mutanaqisah Home Financing as the IFIs’ departure from traditional
function as a financial intermediary in debt-based financing to being directly involved in
equity-based transactions.

The introduction also mentioned that Musharakah Mutanaqisah Home Financing has
been regarded as an alternative to Al Bai’ Bithaman Aajil (BBA) otherwise known as deferred
payment sale contracts. BBA falls under the concept of Bay’ Al-Inah, where essentially an IFI
sells an asset to a customer for a hiked-up price and the customer buys it on a deferred payment
basis. Then the customer sells back the same asset but at a lower price and the IFI pays it in
cash. Basically, it’s a loan with the face of a sales and purchase agreement, as under Islamic
principles riba or interest is not allowed to be charged, actually even loans are not allowed to
be taken as seen in Surah Al-Baqarah - 2752; so since it is painted as a sales and purchase
agreement, it is like the customer is getting money from the IFI after selling an asset, that way
the customer’s goal of possessing cash can be obtained. The problem with Bay’ Inah is that,
even though it is absent from riba, the fact that the IFI sells the asset to the customer first at a
marked-up price is already religiously grey under Islamic principles. Furthermore, the fact that
the sale and purchase of asset, while seemingly two separate contracts, is actually not for the
possession of the asset but rather for the customer to obtain immediate cash, while repaying his
“initial purchase” on a deferred basis but at a different price than what he sold it for, which
does not make sense as it is the same asset. Ergo, it has been strongly frowned upon by various
Islamic jurists as just a backdoor to usury. Through the introduction of this chapter, at brief,
Musharakah Mutanaqisah Home Financing seems to overcome the issue of Bay’ Inah as the
IFI is also jointly purchasing the asset and the customer is not selling it back to get cash but

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Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That
is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest.
Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case
is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever.

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rather purchasing the asset back from the IFI to obtain possession of it. The following sub-
topics further explain this concept and will be further elaborated below.

2. THE CONCEPT OF MUSHARAKAH MUTANAQISAH

This part of the chapter discusses the concept of Musharakah Mutanaqisah. First it dives
into examining what Musharakah Mutanaqisah means, where it is derived from a combination
of 2 words. Musharakah is an Arabic word, where its root sharaka means “one joining others”.
From this the authors elaborated that Musharakah is a contract between partners to contribute
capital to a venture, where profits or losses are shared in proportion to the Musharakah
agreement and the share of each partner’s capital. Musharakah also means sharikah or sharkah
that is defined as a partnership between 2 or more parties that are empowered by a contractual
relationship or ‘aqad by virtue of Syariah law, where all contracting parties share profit and
bear loss from the partnership. Meanwhile, Mutanaqisah is an Arabic word that means
decreasing or diminishing. Musharakah Mutanaqisah cannot be found in fiqh literature as it is
an innovative product that consists of multiple classic Islamic contracts. According to the
Syariah resolutions, under Musharakah Mutanaqisah the modus-operandi begins with the
genesis of a partnership with the intention to co-own a property, where after one partner gives
the other the right to buy his shares based on their pre-agreed terms. Essentially, Musharakah
Mutanaqisah consists of 3 contracts, musharakah, ijarah and bai’. The authors also highlight
that the validity of Musharakah Mutanaqisah Home Financing in Malaysia is derived from the
endorsement of the Syariah resolution by the Syariah Advisory Council of Bank Negara
Malaysia (SAC of BNM), where for Musharakah Mutanaqisah Home Financing to be valid,
collective contracts of musharakah, and ijarah are allowed so long as both contracts are
concluded separately.

This chapter also discusses the dispute between identifying what type of contract
Musharakah Mutanaqisah Home Financing is. Under Musharakah Mutanaqisah there are two
limbs of contracts: partnership in ownership or Shirkah Al Milk and contractual partnership or
Shirkah Al Aqd. This part of the chapter looks into and identifies whether Musharakah
Mutanaqisah Home Financing falls under Shirkah Al Milk (joint ownership) or Shirkah Al Aqd
(contractual partnership). The authors then discuss dissenting views from 5 different parties,
which can be summarized into one saying it is a joint ownership, another saying it is a joint
ownership that turns into a contractual partnership, one party disagrees that it is either the two

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and another says it is solely a contractual partnership. However, the view that matters and
defines what type of contract Musharakah Mutanaqisah Home Financing is, is the policy
document of Musharakah issued by the SAC of BNM; that states Musharakah Mutanaqisah
Home Financing is a joint ownership contract as it is arranged with other contracts such as,
ijarah, ijarah mawsufah fi zimmah, bai ‘musawamah and istisna’ and can be considered as
Shirkah Al’Milk or joint ownership from the beginning of its contract until the end of its tenure.

3. THE STRUCTURE OF MUSHARAKAH MUTANAQISAH HOME FINANCING

This sub-topic discusses the structure of Musharakah Mutanaqisah Home Financing

including the procedures for the type of property being applied for and termination practices.

Musharakah Mutanaqisah Home Financing can be used for both completed and non-
completed properties. For completed properties there are three stages to the Musharakah
Mutanaqisah Home Financing contract. Firstly, the partnership agreement, where the customer
identifies the property, they wish to purchase and request the IFI for funding. To which the IFI
and customer will enter into a Musharakah Mutanaqisah arrangement to acquire the property.
As aforementioned, the customer will usually pay a 10% deposit on the house to signify his
share in the Musharakah Mutanaqisah venture, while the IFI covers the remainder of the
amount. Post that, the customer and IFI will jointly purchase the property and joint ownership
is established through the Musharakah agreement. At the second stage, both parties create a
lease agreement where the IFI will lease out their share to the customer on the basis of Ijarah
for a certain amount of rental. The Ijarah agreement shall include all the details about the rent,
formula of its calculation and a schedule period for the repayment of the lease. The third stage
is the sale, where the customer purchases the IFI’s share in the joint property over a deferred
period. With the monthly rental payments based on the Ijarah agreement, the customer
gradually buys the IFIs share in the property and once all of the shares have been purchased,
the ownership title shall be transferred to the customer, and the partnership between the IFI and
customer ceases.

As for property under construction, the IFI practice is very similar to already constructed
property except that IFIs will charge advance rental or Ijarah Mawsufah Fi Zimmah where the
customer starts paying the lease of the IFI’s share during the construction itself. In the event
the construction is abandoned, customers will be refunded for the advance rental they have paid
according to the terms set by the IFI.

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 Much like conventional banking house loans, Musharakah Mutanaqisah Home Financing
also requires a security to protect the interests of IFIs. There are two ways IFIs in Malaysia
approach the issue of security. Firstly, the customer is registered as legal owner of the property,
but the IFI holds a registered charge over the house. This is very much like the security enforced
by conventional banks. While the customer is the registered proprietor of the property, the IFI
holds a charge over it and in the event the customer defaults payment, has the right to proceed
with an auction of the property. Where the proceeds of the auction are surplus, the customer
gets the balance but where the proceeds are not enough to cover the IFI’s share in the property,
then the customer has to top up the balance. Secondly, the IFI is registered as the legal owner
and acts as a trustee for both parties. This practice can only be seen by Kuwait Finance House
Malaysia Berhad (KFHMB) where the property is initially registered in their name and a Trust
Deed is executed under Section 344 of the National Land Code 1965, for the IFI to be a trustee
for both them and the customer. If the customer defaults in payment, then the property will be
sold and just as above where proceeds are in surplus the customer gets the difference and when
in deficit the customer pays the difference. KFHMB’s approach to security is only allowing
the customer to become the registered proprietor of the property once they have finished paying
off the lease.

This sub-topic also discusses the procedure for termination of Musharakah Mutanaqisah
Home Financing where the customer defaults payment, where there are two approaches taken
by IFIs. Firstly, there is termination with wa’ad or without wa’ad. Wa’ad is defined as the
promise made by one person to another to undertake a certain actual or verbal disposal benefit
to a second party or a verbal proposition made by someone undertaking something for the
benefit of another person.

In general, wa’ad under Musharakah Mutanaqisah exists in 2 circumstances. Firstly, where

a customer has promised to gradually purchase the IFI’s share in their property. Here the gist
of deed of promise or purchase undertaking is the wa’ad where for the IFI to agree to enter into
the Musharakah Mutanaqisah, the customer must promise to gradually purchase the IFI’s
shares in the property. This is also knowns as purchase undertaking.

Secondly, the customer’s promise to purchase the IFI’s share in the event of default. It is
important to note here that contrary to conventional loans, Musharakah Mutanaqisah Home
Financing is not a loan. It is a co-purchasing with a subsequent agreement that the customer
will gradually purchase the IFIs share in the property therefore there is no implied term that in

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the event of default a customer has to pay for the full amount of the property. Conversely to
conventional loans, the customer already owes the set amount to the bank, meanwhile under
Musharakah Mutanaqisah Home Financing, the obligation to pay only comes from the
customer gradually paying for the IFI’s share in their property so that they can own it.
Therefore, IFIs have set safeguards to ensure that they are reimbursed for their share in the
joint property purchase by ensuring there is a binding agreement that mandates the customer
to purchase the share of the IFI even during a default of their agreement. Ergo, even if the
customer fails to pay, they are mandated to pay or purchase the remaining of the IFIs shares,
whether it be by sale of the property though auction or other means. In this situation, wa’ad is
the customers promise to purchase the IFI’s outstanding shares in the property in the event of
default of their agreement. Even though the Musharakah Mutanaqisah is terminated in the
event of default, the customer is still obliged to buy the IFI’s outstanding of shares in full or
the IFI has the right to auction the property off. This is known as second purchase undertaking.

For termination with wa’ad, IFI’s enforce the above, second purchase undertaking. The
customer is legally obliged to purchase the IFI’s outstanding share in the property in full in the
event of default or else the property will be auctioned off. For termination without wa’ad, the
property will immediately be auctioned off and the proceeds of the sale will be used to pay off
the IFI’s share in the property, where any remainder will be given back to the customer. The
difference between the two is that with wa’ad, the customer still has a chance to keep their
property, but they have to pay the IFI’s remaining share in one shot, if not the property will be
auctioned off. Meanwhile, without wa’ad, the property is just auctioned off and the proceeds
are used to purchase the remainder of the IFI’s share, so the customer loses their property.

4. PRACTICES AND OPERATION OF MUSHARAKAH MUTANAQISAH

HOME FINANCING IN MALAYSIA

This part of the chapter focuses on statistics of the practice of Musharakah Mutanaqisah
Home Financing by IFIs in Malaysia, where the authors found that only 9 banks in Malaysia
offer Musharakah Mutanaqisah Home Financing, where 4 are local Islamic banks, 4 are
foreign Islamic banks and only 1 foreign commercial bank. This is out of the 56 registered
financial institutions under BNM that consist of 26 Commercial Banks, 16 Islamic Banks, 1
International Islamic Bank, 11 Investment Banks and 2 other financial institutions. The contrast
of number of IFIs and the number that actually provide Musharakah Mutanaqisah is rather

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baffling. Based on the above summarized statistics, only 50% of Islamic Banks in Malaysia
and 3.7% of Commercial Banks in Malaysia offer this product. While of course it is
understandable that more Islamic banks offer this product since it is an Islamic product, it is
still rather shocking to see only 50% of IFIs in Malaysia offer this product, and even out of that
50%, half of it are foreign Islamic banks. It begs the question, where are the local Islamic banks
and why are they not offering Musharakah Mutanaqisah Home Financing? Especially since
Musharakah Mutanaqisah Home Financing is Shariah compliant and endorsed as permissible
by the SAC of BNM. Furthermore, the authors share that out of the aforementioned banks that
offer Musharakah Mutanaqisah Home Financing, no local banks list it as Musharakah
Mutanaqisah, only the Islamic foreign banks do. Instead, the local banks name it similar to
conventional banking housing loans with the added “-i" at the back of the name, to show it is
an Islamic product. While it is reasonable to infer that this is due to marketing granted most of
the public are unfamiliar to Arabic terms, it poses a concern as it may raise an assumption that
it is a mirror of conventional housing loans. Oddly, despite how much simpler Musharakah
Mutanaqisah Home Financing is compared to other products such as Tawarruq, there are still
many IFIs in Malaysia that do not offer this product, and even the ones that do, do not promote
it as the name of what it really is. This shows a lack of awareness in the community on this
product, which is such a shame as it is much simpler, and it is not really like a loan as it is
basically like buying a share in the property but over a deferred period.

5. CONCLUSION

The authors have concluded in this chapter that Musharakah Mutanaqisah Home Financing
is not very popular among IFIs in Malaysia where in 2015, only 13.6% of IFIs in Malaysia
provide this product. In fact, several Malaysian IFIs have discontinued Musharakah
Mutanaqisah Home Financing where from 2014 to 2017, the 8 banks that offered it have
dropped to only 5. However, it is very reasonable to understand why. Offering Musharakah
Mutanaqisah as a means to home financing is very risky for IFIs as it requires them to go into
joint purchase of the property. Converse to conventional banks that charge high interest rates
on top of their housing loans, IFIs do not have such a liberty, and while there are safeguards
like IFIs having a charge over the property or like KFHMB having the property in their name
and IFIs being able to auction the property in the event of default, IFIs are still subject to
financing a majority of the purchase, and even with auctions, if the proceeds are not enough to

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cover the cost of the IFI’s shares, the customer may run away and omit payment, leaving IFIs
at a lost. As a result, most IFIs in Malaysia can be seen to offer other products such as
commodity Murabahah or Tawarruq. Besides that, Musharakah Mutanaqisah is still not very
common amongst the people hence why most local IFIs prefer to use conventional terms, like
house financing, to cater to the understanding of the people. Conversely, Musharakah
Mutanaqisah is seen more in foreign IFIs which shows they are more receptive to it.

AFTERWORD

From this chapter, we can summarise that Musharakah Mutanaqisah is an alternative

to Home Financing that is also in line with Islamic law. In short, a Musharakah Mutanaqisah
Home Financing contract is a joint ownership agreement between a customer and IFI, where
the IFI puts forth a majority of the funds first and the customer agrees to gradually buy back
the shares the IFI holds in their property through an Ijarah. It can be used to finance both
constructed property and property that is still under construction. Musharakah Mutanaqisah is
a Shirkah Al Milk or joint ownership that has security and can with be terminated wa’ad or
without wa’ad, meaning that a customer may still possess their property so long as they pay in
full the outstanding of the IFIs shares at full or the IFI can opt to auction the house off straight
to cover the cost of their outstanding shares. It is also Shariah compliant and endorsed as
permissible by the SAC of BNM. Despite being much simpler and straightforward, it is not a
very common product in Islamic Banking in Malaysia as it is an Arabic term, ergo most IFIs
in Malaysia that do practice it opt to name it similar to conventional housing loans with an
added “-i” to symbolize it as an Islamic product. We can also see that a majority of banks in
Malaysia do not offer this product.

All in all, this chapter has been extremely beneficial as it has opened my eyes to a
different way Islamic Banking goes around the issue of loans. Prior to reading this, I was
unaware that IFIs even offered such a product as most of the time we hear people opting for
Bay’ Inah or Tawarruq to finance their home purchasing when it comes to adhering to Syariah
principles. However, this chapter has apprised me of an alternative product that actually
overcomes the complexity of the aforementioned examples. For one, it was much easier to
explain to my mother, who immediately understood it, ergo would be much easier to explain
to other people who are asking for suggestions of home financing. Yet, the question still
remains as to why it is not offered more in the market.

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 While this chapter has been extremely insightful and has gauged my interest into
learning more about Musharakah Mutanaqisah Home Financing, it has raised some questions
in me as well. For one, it is unclear why people do not actually opt for this product. While the
authors hint that it is due to its unpopularity as most people are unaware of this product, there
is actually no solid reason provided in the writing to show why many IFIs do not offer it and
why customers do not opt for it. It raises the question as to whether there is actually more than
meets the eye with Musharakah Mutanaqisah Home Financing, like whether its actually more
expensive or has a catch compared to other products like Bay’ Inah or Tawarruq. In the writing,
it mentions that IFIs prefer to name it similar to conventional housing loans as opposed to using
Musharakah Mutanaqisah as most of the public are not familiar with the Arabic term. From
this, I wonder why more IFIs are not creating awareness and educating the public on this
product. As a non-Muslim, it is reasonable that I do not know of Musharakah Mutanaqisah as
an alternative to home financing, but after conferring with my Muslim peers, I found that even
they are not aware of the existence of such a product, which raises a concern as to why more
people are not informed of this product as an alternative for home financing, especially since
it is permissible under Syariah principles. Could it be that this product is actually more of a
hassle to IFIs, hence why they would rather not promote it and put themselves through more
work? This part was unclear in the chapter. The chapter was also unclear as to whether non-
Muslims could apply for this product. In general, non-Muslims are allowed to have Islamic
banking accounts, for example, I have a Bank Islam and CIMB Islamic account, but the chapter
does not state whether non-Muslims can also apply for Musharakah Mutanaqisah Home
Financing or if it is limited to only Muslim customers. These unanswered questions have
ignited a curiosity in me to find out more about Musharakah Mutanaqisah Home Financing,
which is perhaps the authors intention, to spark bewilderment and fascination to know more
about Musharakah Mutanaqisah Home Financing which in turn will raise more awareness
amongst people on the existence of this product. If that is the case, then the authors have
succeeded, as it definitely has sparked a spirit of inquiry in me, which in turn will lead me to
further tell people about this innovation in Islamic Banking. It certainly is a lot easier to explain
than Bay’ Inah or Tawarruq.

Altogether, Musharakah Mutanaqisah Home Financing is a very innovative product to

combat the issue of loans under Syariah principles. It has created an alternative for Muslims
concerned with Syariah adherence to finance the purchase of property according to religious
principles.