PhD

Following the U.S. Subprime Crises of 2007-08, many developed countries went into deep recession. In the literature, there are many reasons provided as probable causes of the crisis. However, it is undeniable that the flaws of the conventional financial system and home financing methods are among the important sources of the crisis. In this thesis, we argue that the damage caused by the Subprime crisis may have been avoided to a considerable extent if true profit and loss sharing (PLS) based method of financing has been applied. In that regards, we suggest an improved version of Islamic home financing called the Enhanced Musharakah Mutanaqisah (EMM). The original musharakah mutanaqisah (MM) home financing is based on a partnership between a customer and a bank in acquiring and taking ownership of a property while at the same time the customer rents the bank’s share of the property. Throughout the partnership period, the customer gradually acquires the bank’s share in the property ending up with full ownership at maturity of the contract. However, rather unfortunately, the current versions of MM home financing practiced by most of the Islamic financial institutions (IFIs) closely resemble conventional housing mortgage. When we scrutinize the contemporary versions of MM home financing, we find many controversial practices and compromises to underlying contracts’ original Shari’ah features. To overcome the controversies and to make the practice truly PLS based, we propose an improved version called the Enhanced Musharakah Mutanagisah (EMM) home financing. The main distinctive features of the EMM are the use of the rental prices or indices as benchmark for product’s revenue and the employment of the market value of the property as its price during share purchase. There are several other enhancements added in the EMM to remove most of controversial practices of current MMs and to make it a true partnership based home financing product.