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The concept of Musharakah Mutanaqisah Partnership (MM8P) home financing and The controversial issues in the contract October 18, 2009

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The concept of Musharakah Mutanaqisah Partnership (MM8P) home financing and The controversial issues in the contract

By Rhesa Yogaswara, S.Si

(rhesayogaswara@yahoo.com)

Musyarakah Mutanaqisah Partnership (MMP) Financing is a contract of partnership with declining ownership as one of the solution of BBA financing in uncertainty condition. It is applicable to most banking and non-banking transactions involving assets, such as land, vehicles, factories, machinery, and office premises.[1]

MMP financing is a new invented transaction that consists of a partnership between two parties in a project that has a potential to generate income. In this contract, one of the partners promises to purchase gradually the shares of the other partner. It is immaterial whether the purchase was made using the income earned by the purchasing partner from the said project or income derived from other sources.

It is featured with the existence of a binding promise on only one of the partners, i.e. he will buy the shares of the other partner, on the basis that the selling partner will have the option of whether to sell or not to sell. This is done by concluding contracts of sale upon the purchasing partner buying each part of the selling partner’s shares (the contracts of sale can be concluded using whatever methods, indicate offer and acceptance).[2]

MMP financing is permissible, if the general laws of partnership are observed and the following rules are taken into consideration. First, non-existence of undertaking for either of the partners to purchase the shares of the other partner at cost price, i.e. the price of the shares at inception. This is because doing so will mean that a party is guaranteeing the share of his partner. Conversely, the price of the shares ought to be based on the market price on the day of the sale or based on a price that is agreed upon by both partners, at the time of sale.

Second, non-existence of a stipulation for one of the partners to bear the entire insurance or maintenance expenses. The expenses should instead be borne in proportion to each partner’s shares. Third, profit should be distributed based on the profit sharing ratio. No party is allowed to stipulate a specific amount from the profits or a percentage from the amount of his capital contribution.

Fourth, detailing the contracts and obligations involved in the MMP financing. The last is there should be no stipulation to prevent either of the partners to withdraw his contribution (funding).

The objective of MMP is to make profits from the investment, while the object of investment is the ownership of property, say a house. And al-ijarah contract will be applied as a mechanism to earn rental income. As rentals are paid, it will be distributed as profits to the bank and customer using the contractual profit sharing ratio. The customer can use the profits to purchase shares from the bank.

My opinion, MMP financing is a good solution for home financing with a support from strong legal aspects. I think that dual ownership will make the operational activities so complex. In addition, if the property has a dispute, the escalation process will make both parties, in charged to find the solution. Therefore, the legal aspect is the base things to support operational activities.


[1] Ibid. pg 142

[2] The International Council of Fiqh Academy. Organization of Islamic Conferences (OIC). Oman, 6 – 11 March 2004

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