In brief
Musharakah is a partnership in which each party contributes capital: profits are shared according to agreed percentages, losses according to contributions. In diminishing musharakah, the client gradually buys the bank’s share and rents the remainder from it: this is the model behind many Islamic home finance products (International Islamic Fiqh Academy, resolution 136, 2004).
Partnership
Two or more partners pool capital for a business activity. Profit is shared according to percentages fixed in advance (never a guaranteed fixed amount); loss is shared according to each partner’s share of the capital. The Qur’an mentions partners, many of whom wrong one another, except those who believe and do good deeds (Sad 38:24).
Diminishing musharakah
For a home: the client and the bank buy the property together (for example 20% and 80%). The client rents the bank’s share and, each month, buys back a portion of it; the client’s share grows to 100%, and the rent falls as the bank’s share shrinks.
The International Islamic Fiqh Academy accepts it on the following conditions (resolution 136 (2/15), Muscat, March 2004):
- a binding promise on one side only to buy the other party’s share;
- no buy-back guaranteed at the original value: the price of each share is its market price at the time of sale, or the price agreed at the time of each sale;
- insurance, structural maintenance and other costs are borne by the partnership according to the shares, and not placed on one partner alone;
- profits are shared in percentages;
- the contracts (partnership, lease, successive sales) remain distinct.
Example
A home worth 250,000; deposit 50,000; the bank holds 200,000. With rent of 4% a year on its share and a constant monthly payment over 20 years, the client pays about 1,212 a month: part of it is rent on the bank’s share, and the rest buys shares. The comparison tool shows how much of the home belongs to you each year.
The debated questions
In practice, many contracts fix a buy-back schedule at a constant price in advance. Some Shariah boards accept this on the view that the price is agreed at the time of each sale; other scholars see it as departing from the market-price requirement. Read the contract and ask which board approved it.
The verses
قَالَ لَقَدْ ظَلَمَكَ بِسُؤَالِ نَعْجَتِكَ إِلَىٰ نِعَاجِهِۦ وَإِنَّ كَثِيرًا مِّنَ ٱلْخُلَطَآءِ لَيَبْغِى بَعْضُهُمْ عَلَىٰ بَعْضٍ إِلَّا ٱلَّذِينَ ءَامَنُوا۟ وَعَمِلُوا۟ ٱلصَّٰلِحَٰتِ وَقَلِيلٌ مَّا هُمْ وَظَنَّ دَاوُۥدُ أَنَّمَا فَتَنَّٰهُ فَٱسْتَغْفَرَ رَبَّهُۥ وَخَرَّ رَاكِعًا وَأَنَابَ ٢٤
[David] said, "He has certainly wronged you in demanding your ewe [in addition] to his ewes. And indeed, many associates oppress one another, except for those who believe and do righteous deeds - and few are they." And David became certain that We had tried him, and he asked forgiveness of his Lord and fell down bowing [in prostration] and turned in repentance [to Allāh].
Frequently asked questions
What happens if the home loses value?
In a genuine partnership, the loss is shared according to the shares. In practice, many contracts provide for buy-back at a fixed price: check the clause, as it is one of the most debated points.
Is it more expensive than a loan?
Not necessarily: the rent often follows market rates. Compare the monthly payment, the total cost and the fees using the comparison tool.