Shariah contracts underpinning Musharakah Mutanaqisah financing : a conceptual analysis

Abstract EN

This paper examines the Shariah contracts applicable in mushārakah mutanāqiṣah financing (MMF) (diminishing partnership) and possible Shariah issues arising from the combination of different Shariah contracts to effect the financing.

The paper employs the qualitative research method, using textual and document analysis.

It finds that the fiqh characterization of MMF by the International Islamic Fiqh Academy of the Organisation of Islamic Cooperation (IFA-OIC), which is also found in the Bank Negara Malaysia (BNM) Shariah Standard on Musyarakah, is the best contemporary approach, but it needs to be explicated.

This paper identifies two major phases of MMF that are essential to attaining its objective: partnership and ownership, each phase with its own underlying and supporting contracts.

It suggests that the partnership phase, which involves either shirkat al-milk (partnership in ownership) or shirkat al-ʿaqd (contractual partnership), should be separate from the ownership phase, which applies either a bayʿ (sale) or hibah (gift) contract.

The process also involves a number of subordinate contracts in the form of lease (ijārah), forward lease (ijārah mawṣūfah fī al-dhimmah) and manufacturing contract (istiṣnāʿ) as well as a purchase undertaking (waʿd).

Lastly, the contractual phases of MMF discussed in this paper and pertinent issues highlighted could guide contracting parties towards a better understanding of each contract involved in MMF and what is to be expected from them.