Nigerian Islamic Housing Finance: Expert Calls for Diminishing Musharakah

The housing deficit in Nigeria has been estimated at 22m housing units hence requiring a rethink of the home finance business. Mr. Ahmed Ali Siddiqui, Director IBA Centre for Excellence in Islamic Finance (CEIF)and SEVP & Group Head Shari’ah Compliance Department of Meezan Bank Ltd, recently discussed the concept of Islamic housing finance and various product offerings, he called for the adoption of Diminishing Musharakah as an alternative housing finance model.

Diminishing Musharakah- Getting A Loan to Own

Musharakah is a partnership arrangement in Islamic finance in which profits and losses are shared. Musharakah is frequently used in the purchase of property and real estate, in providing credit for investment projects, and to finance large purchases.

Siddiqui explained that in going for home finance in a conventional bank the lender would provide a loan to buy the house, this is different from the Islamic home finance model where a customer requesting for shariah-compliant home finance would not be given a loan but would enter into a home acquisition partnership agreement.

The Islamic bank would check for personal eligibility and would ask about details of the property to be acquired, the bank would check if the property was within approval limits and of the appropriate quality and cost. A third step would be that the bank would jointly buy the house as a co-owner and put up 50% of the thereby making the bank an equal partner in the home’s equity.

In this instance the Islamic bank would not give a loan but buy the property along with the customer and the bank would make payment to the seller. This would make the Islamic bank a partner/co-owner of the property.

After becoming a joint owner of the property the bank would require the customer to pay a monthly rent.  The customer would subsequently pay the monthly rent to buy out the equity of the bank within an agreed period. Siddiqui said that this process was called diminishing Musharakah and it remained one of the most commonly used products for Islamic housing finance globally.

Types of Musharakah -The Partnership Jump Boards

• Shirkat-ul-Milk: Joint ownership of two or more persons in a particular property
• Shirkat-ul-Aqd: A partnership affected by mutual contract. It can also be translated as a joint commercial enterprise.  

The Staircase to Islamic Home Ownership

• a property or an equipment
•  or in a joint commercial enterprise

Diminishing Musharakah involves taking shares in the ownership of a specific asset and then gradually transferring complete ownership to the other partner/s. This concept irests on the declining ownership of the financier.

Three Components

• Joint ownership of the bank and customer
• The customer as a lessee uses the share of the bank
• Redemption of the shares of the bank by the customer

Mode of Fixed Asset Financing  

Diminishing Musharakah is commonly used for financing of fixed assets by various  Islamic Banks

1. House Financing
2. Car Financing
3. Plant and machinery financing
4. All other fixed Assets

Basic structure

1. The customer approaches the Bank with the request for Project/Machinery/Housing financing
2. The bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them play their respective shares to the seller of the asset.
3. Customer pays rent for the use of banks share in the property
4. Ownership of the asset is gradually transferred to the customer upon payment of asset price.  (with the help of a sale transaction between bank & customer at the end of each period) 

Shariah Principles

1. To create joint ownership in the property is called Shirkat–ul–Milk and is expressly allowed by all schools of Islamic Jurisprudence.
2. All Muslim Jurists agree on the permissibility of the Financier leasing his share in the property to the client and charging him rent i.e. the permissibility of leasing one’s share to his partner.
3. There is a difference of opinion among leasing one’s share to a third party but there is no difference in permissibility on leasing to a partner
4. The promise of the client to purchase units of share of the financier is also allowed
5. The Transactions can not be combined in a single-arrangements and they have to be executed independently.   

The Takeaways

Housing is a critical socio-economic sector and the diminishing Musharakah /Ijarah agreement is a product that could be adopted for Islamic Home finance. In this case, the bank owns the property but takes into account the wellbeing of the customer, which gives lenders and borrowers assurances of mutual protection of interest as they share the risk of property ownership.