126

Generalized Formulae for Islamic Home

Financing through the Musharakah
Mutanaqisah Contracts
Abdullah rolu, crcl Kalayc,
Gultckin zdcmir, A. Cuncyt ctin and
Hayrcttin Usul
Abstract
Te origin of Musharakah is an Arabic term which signies the
sharing of an item. In the system of Musharakah, all parties share
the prot or loss in a joint enterprise. It arose as an ideal alternative
for interest-based nancing systems for both the production and ser-
vice sectors (Usmani, 1999). Te model of Musharakah Mutanaq-
isah Partnership (MMP) is an interest-free nancing model in
which capital is not permanent and every repayment of capital by
the entrepreneur will diminish the total capital ratio for the capital
provider. When the capital ratio for the capital provider declines
to zero, the entrepreneur becomes the sole owner for the business
(Abdul Rahman, 2007). Generally, the MMP models are related to
home nancing and repayments are constant. In this study, general
formulae are derived for the case in which repayments occur as a
linear-gradient series for the MMP model. In addition, an illus-
trative exampleis presented.
Keywords: Musharakah, Mutanaqisah Partnership, Home Fi-
nancing, Interest-free Mortgage.
Introduction
Tc Musharakah Mutanaqisah Partncrship (MMP) modcl is an !s
lamic nancc modcl bascd on a diminishing partncrship conccpt (Mccra
(Corrcsponding Author) Sulcyman cmircl Univcrsity, Faculty ol conomics and Ad
ministrativc Scicnccs, cpartmcnt ol Managcmcnt, 32260 unur, !sparta, Turkcy.
Mail: crogluCibbl.sdu.cdu.tr
Afro Eurasian Studies, \ol. 1, !ssuc 1, Spring 2012, 126133
127
and Razak, 2005). Tc MMP modcl works as lollows lor homc nancing:
A customcr signs a contract with a nancial institution to buy a homc a
ccrtain pcrccntagc ol which is nanccd by thc customcr and thc rcmaining
part ol which is nanccd by thc nancial institution. Tc customcr movcs
into thc homc and pays rcnt to thc nancial institution. Tc sharing ol thc
rcnt occurs at thc cnd ol cach month according to thc proportions ol cach
party. Tc customcr also pays somc amount ol moncy in addition to his
sharc ol thc rcnt to thc nancial institution cach month to bccomc in duc
coursc thc 100 owncr ol thc homc. Tcrclorc, thc sharc ol thc customcr
incrcascs with rcntal paymcnts and rcpaymcnts and rcachcs a gurc ol
100 somc timc altcr thc application ol thc MMP modcl cnds.
Grcco, and Matthcws ct all. comparcd convcntional mortgagc mod
cls with thc MMP modcl and concludcd that thc MMP modcl has somc
advantagcs ovcr a convcntional mortgagc (schcmc). Tcsc authors labclcd
thc MMP modcl as an !slamic mortgagc or sharc cquity homc nancing
modcl.
Tc gcncral lormulac whcrc rcpaymcnts arc constant arc obtaincd
by Mccra and Razzak (2005). Numcrical cxamplcs arc givcn by Abidin
ct all., Hijazi and Hanil, Mccra and Razzak (2009), Rammal (2004), and
Siswantoro and Qoyyimah. Tcrc would bc othcr modcls with variablc rc
paymcnts too. rolu ct all. (2010) dcrivcd gcncral lormulac lor thc modcl
with gcomctric gradicnt rcpaymcnts.
!t is important to rcach morc customcrs to providc lor an incrcasc
lor thc rcpaymcnt options in thc MMP modcl. !n this study, gcncral lor
mulac lor thc modcl with rcpaymcnts as lincar gradicnt scrics arc dcrivcd
and thc modclis supportcd with a numcrical cxamplc.
Tc lollowing notations arc uscd in this study:
C
0
buycrs initial cquity,
C
k
buycrs cquity at thc cnd ol k
th
month,
8
0
nancing institutions (or coop banks) initial cquity,
P purchasing pricc ol thc propcrty, thcrclorc, P = C
0
+ B
0
,
A
k
rcpaymcnt to thc nancinginstitution at thc cnd ol kth month,
A rcpaymcnt to thc nancing institution at thc cnd ol 1
th
month, i.c. A
- A
1
,
R monthly rcntal incomc ol thc homc,
R
k
rcntal incomc bclonging to buycr at thc cnd ol k
th
month,
i.c., ,
n numbcr ol rcpaymcnts.
128
Derivation of Generalized Formulae for the MMP Model
with Repayments Occur as a Linear Gradient Series
Tc MMP modcl works as lollows: A homc with thc purchasing
pricc ol P is bought whilc thc amount ol C
0
is paid by thc customcr and
thc rcmaining amount (B
0
) is paid by thc nancing institution. Tc cus
tomcr movcs into thc homc and thc sharc ol thc customcr bccomcs C
0
/P.
Tc customcr pays his/hcr rcnt to thc nancing institution at thc cnd ol
cach month. Tc customcrs portion ol thc rcnt | | is acccptcd
by thc nancing institution as rcpaymcnt at thc cnd ol cach month. Tus,
rcpaymcnt lrom thc rcnt incrcascs with rcspcct to thcprior month. Tc
customcr can bccomc thc 100 owncr ol thc homc in a shortcr timc by
paying somc amount ol moncy (D
k
) in addition to his sharc ol thc rcnt
to thc nancial institution cach month. !n this casc, thc lrcqucntlyuscd
rcpaymcnt plan is onc ol rcpaymcnts in constant amounts. !n addition,
rcpaymcnts can bc calculatcd as gcomctric or lincar gradicnt scrics. Hav
ing morc rcpaymcnt options lor nancing institutions arc vcry important
in tcrms ol rcaching morc customcrs. !n this scction, gcncral lormulac arc
dcrivcd lor thc casc in which rcpaymcnts occur as a lincargradicnt scrics
lor thc MMP modcl. Tc situation dcscribcd by a lincar gradicnt scrics ol
rcpaymcnts could bc dcncd as lollows: Rcpaymcnts occur as pcriods, c.g.
months, and thc dicrcncc bctwccn thc rcpaymcnts ol scqucntial pcriods
is constant. !l thc amount ol changc in rcpaymcnts (incrcasc or dccrcasc)
in a scqucntial pcriod is dcncd with vthcn thc lormula ol thc amount ol
rcpaymcnts by thc customcr can bc writtcn as lollows:
!n othcr words, cquation (1) lorms thc conditions ol rcpaymcnts lor
thc lincar gradicnt scrics.
Sincc, thc buycrs cquity at thc cnd ol kth month cquals thc summa
tions ol thc buycrs cquity at thc cnd ol (k1)
th
month, thc rcntal incomc
owcd by thcbuycr at thc cnd ol kth month and thc rcpaymcnt to bc paid
by thc buycr at thc cnd ol kth month, can bc writtcn as lollows:
(1)
129
whcrc.
Tc lollowing cxprcssions can bc obtaincd lrom thc cquation (2) lor
k- 0, 1, 2, , n:
Sincc thc buycrs cquity would bc P at thc cnd ol nth month, thc
lollowing cquation is dcrivcd lrom cquation (3):
(see appendix)
(2)
(3)
130
Tc lollowing cquations can bc obtaincd lrom cquation (4):
Example
A customcr signs a contract with a bank and buys a homc worth
8100,000 and movcs into thc homc. Lcts assumc that thc customcr makcs
a down paymcnt ol 8 20,000 and 880,000 ol thc homc would bc nanccd
by thc bank. Tus, thc customcr owns 20 ol thc homc and thc bank owns
80 ol thc homc. Tc rcntal incomc ol thc homc is 8500 pcr month. Tc
customcr pays thc rcnt to thc bank at thc cnd ol cach month. 8oth partics
sharc thc rcntal incomc according to thcir portion on thc homc. Tcrclorc,
thc customcrs proportion ol thc rcntal incomc is paid to thc bank as rc
paymcnt. Also, thc customcr pays somc amount ol moncy in addition to
his sharc ol thc rcnt to thc bank. !l thc customcr wants to cnd thc mort
gagc pcriod within 120 months whcn monthly rcpaymcnts incrcascs by
83, what would bc thc rst monthly rcpaymcnt (A-A1):
P = 100,000 C
0
= 20,000, B
0
= 80,000n = 120 R = 500, v = 3
A is calculatcd as $227.51 lrom cquation (7). Tablc 1 summarizcs
thc buycrs cquity, rcntal sharc, rcpaymcnts, and thc nancing institutions
cquity and rcntal incomc lor 120 months.
(4)
(5)
(6)
(7)
131
(8)
(9)
(10)
Te Order
of Te
Payment
(k)
Te Buyer
Te Financing Institution
(or coop bank)
Equity ($)
(C
k
)
[from (3)]
Equity
Percentage
[(Ck/P)*100|
Rental
Share
($) (R
k
)
Repayment
($)
(A
k
)
[from (1)]
Equity
($)
(P-C
k
)
Equity
Percentage
Rental
Share
($)
(R-R
k
)
0
1
2
3
4

25
26

85
86

118
119
120
20,000.00
20,327.51
20,659.66
20,996.47
21,337.96

29,633.89
30,084.57

66,939.94
67,757.15

97,850.12
98,920.88
100,000.00
20.000
20.328
20.660
20.996
21.338

29.634
30.085

66.940
67.757

97.850
98.921
100.00

100.00
101.64
103.30
104.98

145.94
148.17

330.65
334.70

483.94
489.25
494.60

227.51
230.51
233.51
236.51

299.51
302.51

479.51
482.51

578.51
581.51
584.51
80,000.00
79,672.49
79,340.34
79,003.53
78,662.04

70,366.11
69,915.43

33,060.06
32,242.85

2,149.88
1,079.12
0.00
80.000
79.672
79.340
79.004
78.662

70.366
69.915

33.060
32.243

2.150
1.079
0.000

400.00
398.36
396.70
395.02

354.06
351.83

169.35
165.30

16.06
10.75
5.40
Table 1. Solution Rcsults lor Rcpaymcnts with a Lincar Gradicnt Scrics
!l v-0, thcn cquations (3), (6) and (7) rcducc to cquations (8),(9) and
(10) rcspcctivcly.
Tc cquations (8),(9) and (10) bclong to thc MMP modcl with con
stant rcpaymcnts.
Conclusion
Gcncrally in !slamic homc nancing modcls, rcpaymcnts arc con
stant. cring dicrcnt rcpaymcnt options lor nancing institutions al
lows acccss to a grcatcr numbcr ol customcrs. Tcrclorc, introducing ncw
132
nancc modcls is cxtrcmcly important. !n this study, a ncw MMP modcl
is prcscntcd whcrc thc rcpaymcnts arc dicrcnt than thc currcnt nanc
ing modcls. Tc rcpaymcnts ol thc prcscntcd modcl lorm a lincar gradi
cnt scrics. Gcncral lormulac arc dcrivcd lor thc modcl and thc modcl is
supportcd with an cxamplc. Tis study constitutcs a basis lor ncw nancc
modcls lor luturc rcscarch purposcs. icrcnt typcs ol nancc modcls
hclp nancing institutions to rcach morc divcrsc customcr prolcs and
gcncratc grcatcr prot, so providing an opportunity to thc gcncral ccono
my to rcalizc incrcascd turn ovcr.
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