Home Financing through Diminishing Musharakah by Islamic Financial Institutions in Pakistan: An Analysis

Abstract

Islamic Financial institutions, in Pakistan, have developed the product of Diminishing Musharakah (DM) for home financing Diminishing Musharakah (DM) involves the contracts of Partnership, Sale and Lease at the same time. In order to be shariah compliant these contracts must be independent so that one transaction does not become a condition of the other. IFIs are bound to carry out the financing by adhering to all the necessary principles of the respective transactions as provided by Islamic law of contract and business transactions. The study, through qualitative content analysis, examines the practice of DM product as practiced by both the fully-fledged Islamic bank, and the conventional bank through its Islamic branch in Pakistan. The research finds that in practices of the DM product by IFIs involved certain Shariah issues, such as the essential principles of the contract of Musharakah are not adhered to properly and in the joint purchase of the house all the fee charges and expenses are solely borne by one partner (the customer). Moreover, the conventional bank, through its Islamic branch, increases the price of its shares in case a customer wants to go for the early settlement and the three different transactions involved are not free from the risk of being dependent on one another. The study suggest that IFIs need to make some changes in the applicable model of DM, in order to achieve their main objective that is offering Shariah compliant products.