The Comparison between Musharakah Mutanaqishah and Conventional Leasing Structures, Which One is better?

By Muhammad Iman Sastra Mihajat

Abstract

As an alternative to conventional interest-based leasing structure, Islamic finance has come with Musharakah Mutanaqisah (MMQ) mode of contract that is currently in existence. The MMQ is a form of a musharakah (partnership) in which one partner promises to buy the equity share of the other partner gradually until the title to the equity is completely transferred to him. Upon the purchase of property, the Bank will lease the usufruct of its undivided share in the property to the customer against rental payments (ijarah) through periodic installment. Each installment will contain purchase of Bank’s equity and lease rental. In the middle of financing if the customer default, he has some percentage of ownership over the asset, while in the conventional leasing, the customer will not own any percentage of ownership over asset unless and until the customer has made full payment until maturity period. The contemporary Muslim Scholars have consensus on the permissibility of the MMQ contract. This paper compares the MMQ model with conventional leasing structure and seeks as to which one is better. The paper concludes that the MMQ is better than conventional leasing structure for the customer and the Bank giving both several advantages.