Islamic Home Financing
Diminishing musharakah (Musharakah Mutanaqisah) home financing
Diminishing musharakah (MM) home financing — where the bank and customer co-own the property, the customer progressively buys out the bank's share, and pays rental on the bank's remaining share — is permissible and considered the most robust Islamic home financing model.
Full Ruling
Under diminishing musharakah: (1) Bank and customer jointly purchase the property as co-owners. (2) The customer pays rent on the bank's ownership share (a genuine ijarah contract). (3) The customer periodically purchases portions of the bank's share, reducing the bank's ownership and rental payments correspondingly. (4) Eventually the customer owns 100% of the property. (5) Each element — partnership, rental, and sale — is a separate valid contract. (6) Bank's profit comes from rental income on its ownership share, not from a loan.
Rationale & Reasoning
This model is superior to BBA/murabahah because the bank maintains genuine ongoing economic interest in the property. The rental reflects the bank's real ownership share at each point, making the economic substance truly different from interest on a loan.
Rule Basis (Daleel)
- 01Musharakah (partnership) contract
- 02Ijarah (rental) on co-owned property
- 03Progressive purchase of ownership units
Citations & Sources
AAOIFI Shariah Standard No. 17 – Investment Sukuk
AAOIFI · 2003
Ref: SS-17