A Reappraisal of the Legality and Viability of Sales and Partnership Concepts in Islamic Home Financing

The Islamic financial system globally has witnessed a tremendous growth in terms of demand, acceptance and development. The variety of products offered is to meet the ever sophisticated consumers demand and economic changes. For home financing, the application of sales concept under al-Bay Bithaman Ajil (sale with deferred payment) contract is widely used in countries like Malaysia, Indonesia and Brunei even though most of the Middle East scholars have rejected it. Nevertheless, al-Bay Bithaman Ajil contract is heavily criticised for its conceptual and practical problems particularly related to the inconsistencies of the sales concept used for financing purposes. On the other hand, Musharakah Mutanaqisah (diminishing partnership) contract is another innovation that offers a viable alternative which is based on partnership and leasing. The objective of this article is to analyse the strength and practical problems of Musharakah Mutanaqisah contract in Islamic home financing. The study revealed that the partnership foundation of Musharakah Mutanaqisah contract may add to the diversification of the Islamic financial products and attend more to the consumers needs and interests globally. The strength of the concept lies on revenue sharing between the parties, namely the financier and the customer who proportionally share their profits and risks as agreed in the contract. However, practical problems may arise in determining rental rate and risks distributions which the financiers would adapt according to their interests. Ultimately, any Islamic financing packages may need to be made compatible with the prevailing practices of the conventional financing and conceptually, that may attract more controversies