Editing Islamic banking and finance (section)

====Diminishing Musharaka====
''Musharaka al-Mutanaqisa'', (literally "diminishing partnership"), is a popular type of financing for major purchases such as housing. In it, the bank and purchaser (customer) have joint ownership of a purchased asset with the customer also leasing the asset.<ref name="NRinvest">{{cite book
  | last = Nomani
  | first = Farhad
  | author2=Rahnema, Ali.
  | title = Islamic Economic Systems
  | publisher = Zed books limited
  | year=1994
  | location = New Jersey
  | pages = 99–101
  | isbn = 978-1-85649-058-0}}</ref> As the customer gradually paying off the cost the bank's [[Equity (finance)|equity]] share diminishes from all but the customer percentage of downpayment to nothing.<ref name="ifn">{{cite web|url=http://www.islamicfinancenews.com/glossary/musharakah-mutanaqisah |title=Is Musharakah Mutanaqisah a practical alternative to conventional home financing? |website=Islamic Finance News |date=2 December 2015 |access-date=1 August 2016}}</ref> 
If the customer defaults and the asset is sold, the bank and the customer split the proceeds according to each party's current equity.<ref name="Kettell-2011-25">{{cite book|last1=Kettell|first1=Brian|title=The Islamic Banking and Finance Workbook: Step-by-Step Exercises to Help You ...|date=2011|publisher=John Wiley & Sons.|page=25|url=https://books.google.com/books?id=EXmCKEsb4wQC&q=If+default+occurs%2C+both+the+bank+and+the+borrower+receive+a+proportion+of+the+proceeds+from+the+sale+of+the+property&pg=PA25|access-date=8 June 2017|isbn=9780470978054}}</ref>

It would assist at this point to highlight how ''Musharaka al-Mutanaqisa'' is different from conventional banking mortgages, so that the salient difference, both in terms of law and practice is understood. To assist in this understanding, let's first see how regular mortgages work in the United States:

Once a buyer wishes to purchase a home, she approaches the lender and requests a loan. The lender in turn, if buyer qualifies, will lend money to buy the house, and the bank will usually set a fixed percentage of interest to be paid to the lender. Each payment to lender will then include a return of the portion of principal and the interest accrued on the remaining balance for that period. Over time, the entire principal is paid back to the lender, together with all the interest that is due. In terms of the ownership of the house, the buyer/borrower/debtor will have legal title to the house during the term of repayment and thereafter too. In the county title records office, the borrower will have a title deed showing the buyer as the title holder, and not the bank. Any diminishing value of the house is the risk of the borrower and not the bank. On the other hand, any appreciation is also of the borrower and the bank cannot ask for more principal due to the appreciation. Hence, the bank and the borrower know at the outset the exact obligations to each other. The bank, in an effort to secure its loan, will place a lien (a charge) on the property, so that if the borrower does not repay the loan, the bank gets the right to foreclose on the borrower's right to hold title and have the title be transferred to the bank (or the house be auctioned and the proceeds received by bank). In the U.S., most states have a judicial foreclosure process where the bank asks the court to sell the property to recover the balance of its loan and accrued interest, plus any other costs of the suit.

How is then ''Musharaka al-Mutanaqisa'' going to address the interest portion of the payment from borrower to the bank. The concept of title here then becomes critical, because the Islamic bank will still come up with the money to buy the house, but the bank will buy the house in partnership with the homeowner. Together the bank and the borrower will become "tenants in common" and the local recorder office will show both the bank and the buyer as joint owners. The percentage of ownership of the house at this point will be based on money ratio between bank and buyer. Let's assume buyer paid 10% and the bank paid 90% of the price. However, since the bank will not be living in the house, the buyer will agree to a rental payment for the use of the 90% of the portion of the property. In addition, buyer will also agree to buy a certain percent of the bank's portion on a monthly basis. Hence, buyer pays rent for usage, and also an amount to buy out the bank's portion. Since there is no interest being paid, this form of ownership (in partnership) is acceptable under shariah. At the end of the agreed rental term, the buyer will have bought out all of the 90% portion of the partnership, and buyer can then ask the bank to dissolve the partnership. The recorder's office will have a new title deed recorded, whereby the bank ceases to be a tenant-in-common with the buyer, and the buyer becomes the entire title holder (whether alone or with spouse, or any other entity as chosen by buyer).

The essence of both transactions is different, and that is based on the outset as to who exactly legally has title to the house at the outset. The other difference is that the monthly payments by buyer in Islamic banking are rent and partnership buyout payments, and not return of principal and interest as they are in conventional banking. Economically then, the Islamic bank also shares in the risk of house value dropping, where in the conventional banking model the bank has not taken any risk of depressed values. The opposite is true also, where both the Islamic bank and the buyer gain if house is sold for more than the book value of the partnership. In conventional banking, the bank does not benefit from rising prices.

Skeptics of the Islamic banking argue that the result is the same: the buyer makes monthly payments to own the house, much like a conventional mortgage. But has the risk of home ownership not been shared in Islamic banking? If it has legally, then it is not the same as the conventional mortgage transaction.