Islamic Finance

Islamic Mortgages 49

Diminishing musharaka and English law

English law recognizes equity ownership and distinguishes between legal
ownership and equity ownership. The closest structures to diminishing
musharakaunder English law are co-ownership agreements.
Diminishingmusharakaandijarahome finance products will usually use
three main documents:

1. The diminishingmusharakaagreement, which governs the relationship
   between partners (ie. the bank and the customer). In this agreement,
   the bank will have legal title, but the customer will have his beneficial
   interest (or equity) documented. The customer promises to purchase the
   bank’s share over the term of the contract. The customer share will
   increase by making monthly payments;


2. The lease agreement, under which the bank leases its share to the
   customer for monthly rent. The rent will be calculated on the bank’s
   outstanding share in the property. The customer will be the leaseholder
   and by registering the lease at the land registry,the customer protects
   his right to occupy the house; and


3. The charge agreement, through which the customer provides a charge
   over his share in the property and the lease with the bank. This is
   important to the bank to secure the ongoing payments. The charge
   document is the equivalent of the mortgage contract in conventional
   home finance products.