210 AN INTRODUCTION TO ISLAMIC FINANCE
The murabahah mortgage is often criticized on two grounds. First, a
concern is raised that it is fi nancially equivalent to a conventional debt -
based mortgage and therefore does not involve risk sharing — the essence of
Islamic fi nance. Second, this model suits well for fi xed - rate mortgages but
does not offer an option for a variable - or fl oating - rate mortgage.
Diminishing Partnership The third model is based on the diminishing musha-
rakah (equity partnership) where the fi nancier (the mortgage company or
bank) and the buyer form an equity partnership to jointly own the property
and the fi nancier gives the buyer the option/right to buy the fi nancier’s share
over the life of the mortgage. Over this period, the buyer pays monthly
installments comprising the property’s monthly rent and an additional con-
tribution to buy out the mortgagee’s share. Diminishing partnerships can
take various forms and therefore offer fl exibility in the design of the prod-
uct. In a typical diminishing musharakah mortgage, the buyer pays the rent
on the outstanding share owned by the mortgagee, which diminishes with
the age of the mortgage.
For example, if at a given time during the life of the mortgage the ratio
of ownership between buyer and mortgagee is 20:80, the buyer will pay
monthly installments consisting of rent against 80 percent of the value of the
house and the remaining portion will go towards the purchase of mortgagee’s
share. Suppose, after one installment, the new ownership ratio becomes
22:78, the rental portion of the next installment will decrease and the por-
tion to purchase the mortgagee’s share will increase. Thus, over time, the
share of the mortgage will “diminish” and the buyer’s share accelerates till
the buyer owns the property entirely.
While an equity - based mortgage is closer to Islamic principles, it gives
rise to concerns as to whether additional protection is needed for the owner.
For example, as the market value of the property goes up, this will increase
the period over which the owner will have to purchase the mortgagee’s
share. Ansar Finance in Manchester, UK, offers a variation on the diminish-
ing musharakah mortgage whereby the client makes rental payments for the
outstanding share without any obligation to purchase. The client is given
an option to purchase the property at the market value, which protects the
client from negative equity.^2
Cooperative Model The fourth model is similar to a cooperative set - up.
Members buy equity membership in a pool of funds used to purchase prop-
erties for the members.
Mudarabah Companies
As we have seen, a mudarabah is a profi t/loss-sharing contract in which one
party serves as fi nancier while the other apportions the fi nancier’s funds in
Shari’ah - sanctioned business activities. A mudarabah company, therefore, is
one which specializes in fi nancing a portfolio of assets in selected economic