Comparative study of the events of default and its consequences in Musyarakah Mutanaqisah and Al-Ijarah Muntahia Bi Al-Tamlik home financing

Abstract

The paper examines the Musyarakah Mutanaqisah and Al-Ijarah Muntahia Bi Al-Tamlik home financing products which are introduced by the Islamic banking industry as an alternative of Bai` Bithaman Ajil contract which has received criticisms for mimicking conventional loan. The research focuses on aspect of the events of default and its consequences. Both structures are ruled permissible subject to certain criteria by local regulatory and international standard setting bodies. The secondary data shows that Musyarakah Mutanaqisah and Al-Ijarah Muntahia Bi Al-Tamlik have different principles and characteristics which may lead to different set of events of default and consequences. The research analyses both sets of agreements used for Musyarakah Mutanaqisah and Al-Ijarah Muntahia Bi Al-Tamlik home financing products. The main finding indicates that there are similarities of events of default between the products. Furthermore, the events will trigger the Purchase Undertaking by the customer to acquire the outstanding amount or pay the exercise price. The research concludes that the mechanism used to recover the principle and profit in both structures is identical.