Musharakah Mutanaqisah Asset Ownership Model

Musharakah Mutanaqisah (MM) means diminishing partnership with an imbedded Ijarah (lease) element. The model can be used to facilitate the purchase of any fixed assets and not limited to only properties.

A Musharakah venture is formed by two (or more parties) to purchase an asset, the asset is then leased to the party which intends to own the asset. The party intending to own the asset (Partner X) will pay the lease rental to the Musharakah venture and at the same time purchase shares from the other party(ies) (Partner Y).

Despite the tongue twister sounding name, this is a very simple model. Unless of course if we decide to complicate it. My version of MM home acquisition plan is as follows:

Customer and financial institution (FI) enters into a MM venture to purchase a house. Let’s say the value of the property is RM300,000 and the initial capital contribution is 10% by the customer and 90% from the FI. The customer will therefore contribute RM30,000 into the partnership and the remaining RM270,000 is contributed by the FI. Let’s assume the customer agrees to buy the FI’s share of equity over a period of 20 years, he will then have to pay the FI RM1,125 (RM270,000/240 months) every month, increasing his equity ownership of the house every month.

Assuming the market rental for an identical or similar property in the same locality is RM1,000, the customer will have to pay RM900 in lease rental to the MM venture (as 90% of the property is owned by the FI) for the first month. Subsequent rental reduces every month as the rental will be calculated based on the customer’s equity ownership.

At the end of the 240th month, the house is fully owned by the customer.

What if half way through the 20 year agreement the customer decides to sell the house? The FI, having no interest to own the house will obviously agree to sell. At the 120th month, assuming all agreed payments are made promptly, the above house is 45% and 55% owned by the customer and the FI respectively. Let’s assume the house is sold at it’s current market value which is RM390,000. The customer, owning 45% of the property will be entitled to RM175,500 and the remainder, to the FI.

Should the customer decide to pay for the house in full after ten years, all he has to do is pay the FI RM1,125 x 120 months = RM135,000 and the house is 100% his.

If the customer is unable to pay rental for whatever reason, the FI should not force-sell the property. They should take the compassionate route and help the customer to regain his financial footing and not make him worse-off by evicting him. Even if the FI decides to force-sell, the customer, by virtue of being a co-owner, is still entitled to his share of the proceeds, even if the proceeds are not enough to cover the outstanding due to the FI.

This is the rough cut of how I envisage an MM asset ownership programme to be like. It is of course not yet Shariah certified and the accounting issues have yet to be addressed. But like I said, this is only the rough cut; it will be improved over time.

Two of a Kind

All of Malaysia’s anchor banks have Islamic subsidiaries. Three of the foreign conventional banks in Malaysia have Islamic subsidiaries. When BNM directed banks to set up stand alone subsidiaries in place of the Islamic windows, it effectively doubled the number of banks in Malaysia. The country’s sole building society is re-inventing themselves as an Islamic financial institution. A large co-cooperative bank “converted” to Islamic banking some years ago.

Call me a sceptic, an unbeliever but all I see from this is just increasing the number of banks instead of increasing the number of Islamic banks. Why do I say this?

First and foremost, the products are almost identical save for the name and legal documentation. Even the pricing is almost identical. How can that be? The objective of the financial products is the same, no argument about it but the means are not. It is ok to sell lemonade at the same price as beer but it is not possible to make lemonade using the same ingredients as beer.

Secondly, the Islamic subsidiaries are sometimes still treated like a window whereby they are not allowed to compete with the mother bank. What is the purpose of having a separate entity if it is not allowed to act independently? Some of the Islamic subsidiaries’ products are evaluated and approved by conventional mother bank’s product committee. This is akin to getting one’s product approved by a competitor!

Thirdly, the risks associated with Islamic banking are similar yet different from that of a conventional banking system. The fact is that the risks undertaken in a trade or partnership based transaction cannot be identical to that of a debt based transaction. But yet the credit and risk management process in some Islamic subsidiaries are undertaken by the conventional mother bank. Anomaly?

Ok, I’m a sceptic. Or maybe I just don’t see Shariah based banking the same way as the other bankers do. But I strongly believe that the same mindset and approach cannot be used to run distinctly different business models.

Paranoid Americans?

From IFN Newsletter 5th June 2009

However, it’s a completely contrary picture across the Atlantic. Politicians and special interest groups have been very successful in arousing the ire of Americans over terms such as Islam and Shariah even when they are used innocuously. There were howls of protest when the Treasury co-sponsored a forum on the basics of Islamic finance.

A law firm has created an online presentation that claims to show how Islamic finance poses “a real and present danger not just to our Western financial institutions built on disclosure and transparency but to our very system of governance and our way of life.” (http://www.davidyerushalmi.com/Law-Offices-of-David-Yerushalmi-present-Shariah-compliant-finance--disclosure--seminar-for-online-viewing-b9-p0.html) It’s a sure bet that the presentation never mentions how those in these “Western financial institutions” bilked billions of dollars and caused the system to practically collapse, while the losses were relatively minor in scale for those who used Islamic finance.

What takes the cake is that of a federal judge in Michigan who insists on continuing to hear a lawsuit challenging the federal bailout of American International Group (AIG) simply because it has subsidiaries that sell Takaful. Judge Lawrence Zatkoff contends that the US government’s majority ownership of the group raises the question of whether the government is promoting religion, contrary to the First Amendment to the US Constitution. AIG has stressed that its Takaful policies comply with all US laws. “AIG businesses, like other insurers and organizations, tailor programs for a range of religious organizations,” it said. “While they are desirable to those whose religious convictions preclude them from engaging in traditional interest-bearing structures, Takaful is also increasingly popular among non-Muslims who feel that the excess profit/charitable aspect is a socially responsible mechanism for the purchase of insurance.”

Obviously, education and confidence-building are two aspects that must be seriously undertaken if Islamic finance services, now being provided by a handful of firms, are to expand its beachhead in the US.

It is beyond me how stupid and paranoid some people can be. Shariah based finance is all about undertaking financial transactions according to the rules of Shariah. It has nothing to do with professing Islam. Using financial products which conform to the rules of Shariah does not make one a Muslim. The paranoia attached to Shariah based finance is unfounded, how could it be a funding tool for extremists if the products are offered by banks like HSBC, Deutsche, UBS, Standard Chartered, Citibank, Barclays and BNP Paribas? Are we saying these reputable Western banks are part of the extremist (terrorist) conspiracy?

These attacks on Shariah based finance not surprisingly, is sponsored by CSP (refer to my earlier posting – Someone’s Afraid of Shariah Based Finance) and a lawyer by the name of David Yerushalmi is in the forefront in waging war against Shariah based finance. I’m not sure what he is trying to achieve but one thing for sure is that he and his friends will not stop putting Shariah based finance down.

Let’s not waste time, effort and money trying to market Shariah based financial products in the US.