Diminishing Musharaka means the bank and the client enter into a co-ownership agreement with respect to an identified property.
Islamic banking offers an alternative to people wanting to buy property, and anyone can use it, regardless of religion or ethnicity.
Traditionally, property finance is essentially the granting of a loan to a client so they can buy a property. This loan must be repaid with interest over the term of the loan arrangement, says Amman Muhammad, chief executive FNB Islamic Banking.
“The difference with Islamic property finance, however, is that it is based on a concept called ‘Diminishing Musharaka’.”
Diminishing Musharaka means the bank and the client enter into a co-ownership agreement with respect to an identified property. Each party’s proportionate share in the property is based on their respective financial contribution to the total price.
The client then commits to buy the bank’s share at an agreed-upon mark-up in tranches, normally on an annual basis, resulting in the bank’s share being diminished completely over the term of the finance arrangement.
“At the end of the term, the client becomes the sole owner of the property.”
Muhammad says there are four core benefits of the Diminishing Musharaka over conventional bonds:
Certainty – while the instalment in a conventional property loan fluctuates based on the movement of the prime lending rate, the instalment in an Islamic property finance arrangement is fixed for a year at a time.
Flexibility – the client may, on an annual basis, choose to purchase an increased share in the property by paying in a lump sum, in addition to the proportion he wishes to purchase via instalments in the next year. The client may also choose to purchase the property in its entirety at any point during the agreement. The client can also select from flexible financing terms of five to 10 years, as his circumstances require.
Innovative – clients seeking cash-flow relief or additional working capital can use the Islamic commercial property finance product to unlock cash or liquidity from freehold or paid-up property.
This would mean the bank and the client enter into a co-ownership agreement with respect to the identified commercial property, whereby the bank would acquire a share in the client’s property for an agreed price.
Shari’ah compliance – most importantly, this is a credible Shari’ah compliant alternative to conventional commercial property finance.
“This is an innovative product that provides clients with an alternative property financing option that is both flexible and Shari’ah compliant.
Its unique features make it a viable option for any client, Muslim or otherwise, wishing to expand his property portfolio, or even revamp an existing property.”