A theoretical comparison between al-bay` bithaman `ajil, musharakah mutanaqisah partnership and ijarah sukuk

Abstract

Asset acquisition, such as home financing and car financing, takes a large bulk of peoples’ income. The murābahah, which is also known as BBA in Malaysia, is predominantly used in Islamic banks. Deeper analysis shows that the BBA, as practiced in Malaysia, is actually based on bayc al-cinah. On the other hand, MMP consists of a mushārakah (partnership) and an ijārah (leasing) contracts where the equity of the financier follows a diminishing balance method. This paper tries to explore the alternative modes of financing and investment such as mushārakah mutanāqisah partnership (MMP), ijārah and ijārah sukūk and their implementation in the current Islamic banking and finance industry. Throughout the paper we will compare these three modes with predominant one, BBA, from Islamic and economic perspective. The paper concludes that MMP, ijārah and ijārah sukūk have several advantages over BBA. Apart from being Sharīcah compliant, by implementing MMP model we can avoid interest (ribā) totally by using some rental or house index. It is also shown that the balance of financing under MMP, at any point of time, will never exceed the original price of the asset, unlike the BBA where it can go beyond its original price. All these modes of financing are in line with the maqāsid al-Sharīcah since they are not contributing to the macroeconomic problems. Finally, as the Islamic capital market is evolving rapidly, the due attention is given to the ijārah sukūk or Islamic certificates. This investment instrument can be used widely for financing almost every project especially long-term projects. However, for ijārah sukūk to be effective tool of Islamic capital market we need a well developed secondary market to trade these certificates.