An Introduction to Islamic Finance: Theory and Practice

88 AN INTRODUCTION TO ISLAMIC FINANCE

period and also to prevent withdrawals by a depositor from investments
funded by the depositor.
Another form of musharakah is being used to provide housing mort-
gages by forming a contract between the fi nancier and the customer, who
own the real estate jointly. This contract is commonly known as a musha-
rakah mutanaqisah or “diminishing partnership.” Unlike an ijarah - based
mortgage, where the ownership of the house remains with the lessor/owner
for the entire lease period, ownership in a diminishing partnership is explic-
itly shared between the customer and the fi nancier. As the name indicates, the
ownership of the fi nancier diminishes over time as the customer purchases
a share with each monthly payment. The customer’s periodic payments can
be divided into two parts; one paying a proportionate rental to the fi nancier
based on the fi nancier’s share of the property, and the other as an equity
contribution to buy out the fi nancier’s share of the equity. Gradually, over
time, the customer is able to buy out the fi nancier’s share and thus acquires
complete ownership of the property.

INTERMEDIATION CONTRACTS

As mentioned earlier, the Shari’ah makes provision for a set of contracts,
known as “intermediation contracts,” which provide a wide range of typi-
cal intermediation services such as asset transformation, payment system,
custodial services, and risk management. Intermediation contracts can be
further sub - classifi ed into three groups, as shown in Figure 4.3.

Partnership

The fi rst group of intermediation contracts is the most signifi cant; it deals
with intermediation through forming a partnership of capital and entrepre-
neurial skills. The second group, based on the concept of trust, deals with
the placing of assets with intermediaries on the basis of trust for the sake
of protection or security. The third group facilitates explicit and implicit

Intermediation Contracts

Trust

Wadia Amanah Wikala Jo’alah Kifala Rahn Hawala

Partnership Security

Mudarabah Musharakah

FIGURE 4.3 Intermediation contracts