This chapter provides the discussion on accounting issues for musharakah mutanaqisah (MM) home financing in the case of Malaysia. Though the MM mode of financing has addressed the 'ambiguities and risk issues in conventional mortgage financing and the controversy that surrounds other financing packages like al Bai Bithaman Ajil and Bay al Inah (Mydin-Meera & Abdul-Razak, 2009), there are some practical issues in operating this mode of financing, as Islamic banks operate this type of contract more closely to conventional practice, thereby lacking the spirit of the contract itself ...

Despite having abundant literature blaming a faulty financial system and exuberant price expectations as the primary causes of housing bubbles, there is a lack of research that looks at the impact of house price instability on the economy. This study aims to fill this gap by thoroughly examining the connection between house prices and economic output, and the effect of house price volatility on economic stability. Drawing from long-spanning quarterly data from 17 OECD countries from 1970 to 2019, the study develops and tests economic growth and volatility models to uncover significant insights. The empirical results show that house price returns have a significant asymmetric impact on economic growth, with negative returns having twice the effect of positive ones. Moreover, the results indicate that house price volatility significantly contributes to economic instability. In light of these findings, the paper concludes with valuable policy recommendations to enhance the housing market and improve overall economic stability. This study provides a compelling argument for the importance of closely monitoring and regulating the real estate market in order to maintain a healthy and stable economy.

Islamic finance had a healthy double-digit growth in the last decade and an important contribution to this steady success is the increasing demand for Shariah compliant products and services from both Muslims and non-Muslims around the globe. These products and services are perceived to be more resilient in adverse economic conditions, has risk-sharing attributes and provides competitive returns to conventional counterparts. Among others, the musharakah or partnership contract is commonly applied in many investment and financing initiatives. One variation of the musharakah is the musharakah mutanaqisah (or diminishing partnership) that emphasizes on the joint ownership of the asset purchased between the bank and the purchaser (customer).

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.

Musharakah mutanaqisah (MM) mode of Islamic financing purchase of an asset, where the bank and customer enter into a contract of joint property ownership and the customer's ownership of the asset gradually increases throughout the financing period and fully own the asset after the last financial settlement. This mode of financing was introduced to mitigate the issue of unequal risk burden of conventional mortgage financing, where the bank just provide the financing and the customer bears all risk. MM financing reflects a true partnership contract through sharing of risk and reward between both parties. Though the MM mode of financing has the salient features to address the flaws of conventional mortgage financing, there are issues of operating this mode of financing in practice. This paper examines the practical issues in the MM financing and subsequently, recommends possible solutions to mitigate these issues and improve the current practice. Among the pertinent issues highlighted are the use of interest based benchmark for profit calculation, and the application of historical cost value during the tenure of share transfer and the costs of insurance and revaluation borne by the customer.

Among many permissible Islamic finance products, Musharakah or the partnership contract was put forward as a true representation of the PLS concept in the late 1970s. However, due to challenges to fully implement this type of contract in practice, practitioners have improvised a more practical version of the partnership contract termed Musharakah Mutanaqisah (MM) (or Diminishing Partnership). Currently, Musharakah Mutanaqisah is applied in home financing by Islamic banks and proposed as a replacement for Bai Bithaman Ajil and Bay al Inah in Malaysia. Despite the increasing popularity of MM in home financing in the Malaysian Islamic banking industry, there are issues in the way the Islamic banks operate and report this mode of home financing in their annual reports.

This paper theoretically analyzes two alternative modes of home financing. The first mode is the conventional housing loan and the other is enhanced musharakah mutanaqisah (EMM) home financing. Our results reveal the EMM based setting is superior to the conventional housing loans in at least two aspects. These are the prevention of house price inflation in all phases of economic business cycle and the smoothening of real estate cycles. This means that, under the EMM, the risk of real estate bubble formation is subdued, which should prove to be welfare improving.