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.
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.
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