Musharaka – Declining Balance Co-ownership

The term Musharaka, Musharakah, means sharing.  In the context of Islamic Finance,Musharaka is a declining balance co-partnership, and is also a Shariah-compliant method of Islamic Home Finance. There are two types of Musharakah, Permanent Musharaka and Diminishing Musharaka.

You enter a partnership arrangement with a co-owner and sign a contract that specifies the terms of your agreement.  After you find the home you want, you get approval to move ahead, and make an offer.  Your partner or co-owner, usually a professional investment company rather than an individual, provides the lion’s share of the purchase price.

As part of the partnership agreement, you agree to make monthly payments to the partnership for your use of the home as either explicit or implicit rent.. At the same time, you make regularly scheduled investments in the partnership to increase your equity, or ownership share, of the home.  With each payment, the balance you owe the partnership declines and your equity increases.

Setting The Payment

The amount of your monthly payment is determined at the time of purchase, based on several factors including the price of the home, your credit rating, the amount of your initial payment, the term of the contract, and the current and projected fair market value of similar homes in the community where you buy.

Shariah scholars are working with Islamic financial institutions to make the monthly payment schedules more like conventional mortgage amortization, indicating how each payment is divided. The goal is to make the contracts easier to understand and ultimately more available at competitive prices.