diminishing musharakah home finance program
TRANSCRIPT
DIMINISHING MUSHARAKAH HOME FINANCE PROGRAM
By: Camille PaldiCEO of the Franco-American Alliance for Islamic Finance
(FAAIF)
DIMINISHING MUSHARAKAH
• Home-financing. • Bank and customer are co-owners of the house. • Customer makes a deposit while the bank finances the rest of the house
through selling the customer equity units. • As the customer pays for each equity unit, the customer becomes the owner
of the equity unit.
This process continues until the customer is the 100% owner of the house.
DIMINISHING MUSHARAKAH
• Client pays 20% of the price (deposit) and Bank pays 80% of the price of the house. (House purchased jointly by client and the bank)
• The client occupies the house and pays rent to the bank for using his/her share of the property.
• The bank’s 80% share of the house divided into 8 units, each representing 10% ownership in the house. (Schedule of Payments for Eight Units in Diminishing Musharakah Contract).
• Client purchases one unit of the house at 1/10 of the price of the house. It reduces the share in the house of the bank from 80% to 70%. Hence, the rent payable to the financier is also reduced to that extent. Client now owns 30% of the house.
DIMINISHING MUSHARAKAH
• Client purchases second unit, increasing his/her share in the house to 40% while the bank’s share decreases to 60% and consequently reducing the rent to that proportion.
• The amount payable by the Client for each unit declines progressively with each unit purchase.
• This process goes on until the client is the 100% owner of the house.
DIMINISHING MUSHARAKAH
• Illustration:• If there is a default in a diminishing musharakah, the bank sells the house,
but gives back to the customer the value of the equity units.
• In a conventional mortgage, if there is a default, the bank sells the house and keeps the entire purchase price, no matter how much the customer has paid into the house.
DIMINISHING MUSHARAKAH
• Lariba bank uses the mark-to-market and commodity indexation program to value the house in this program.
• First, the bank will look at similar houses with similar specifications in the neighbourhood where the customer would like to buy the house and determine the price in USD.
• Next, the bank will take the value of the house expressed in fiat money and relate it to other commodities existing in the market to determine the fair market rental value. What is the real value of the price (money)? (commodity calibration) If we don’t have fiat money backed by gold and silver, we can determine the real value of fiat currency through commodity calibration or relating the money to other commodities existing in the market to determine the real value of the money.
BENEFIT FOR THE US ECONOMY
The bank will calculate real return on investment using the fair market rental value and determine if it is a profitable investment.
Money is not rented at interest (rental payment), however, rent is based on the real market rental value or the real value of the money.
