BBA vs BTS 10-90 - continued

This post is a continuation from my earlier post entitled "BBA vs BTS 10-90".

After reading the article in Personal Money, I've sent an email to Mahadzir Ahmad to enquire whether the same applies to Musharakah Mutanaqisah (MM) principle since my Islamic loan for my house is using MM concept.

Here is the extract of my email to him:

"My home loan is based on Musyarakah agreement which is based on Musyarakah Mutanaqisah concept. Does the same as BBA applies in my case if the property that I purchased is abandoned? What I understand from this concept is that its a joint venture between the bank and customer. I've gone through the agreement and found out that in case
of an abandonment, the bank and customer will share the cost. Since this concept is based on units gradually transferred from bank to customer, what is my position like since in a case of abandonment, it will likely happen within 1-2 years after I entered into the agreement? At that point of time, of course the bank's portion of unit is bigger. Is it whatever that I've paid during construction period will be refunded to me by the bank? If not, how does this concept
protect house buyers from project abandonment by a developer?"

Musharakah according to the terms in the agreement means "the joint venture entered into between the Bank and the Customer in which the Bank and the Customer contribute to the capital of the Musharakah (whether in cash or in kind) to facilitate the ownership of the Property and the gradual purchase by the Customer of the Bank's stake in the Musharakah throughout the duration of the Equity Home Financing-i Facility based on the Shariah principle of Musharakah Mutanaqisah". In layman terms, MM concept is buying a property via a partnership or joint venture.

While going through the Musharakah Agreement, this is what I found. In case of abandonment of the property:

• any loss incurred due to the abandonment will be shared by the Customer and the Bank in accordance with each party's contribution to the Musharakah respectively; and
• provision set out in clause 6 of the Purchase Undertaking shall be invoked by the Bank. Clause 6 states that the Customer shall pay to the Bank based on the following formulae:
• Disbursed Amount + Outstanding Forward Ijarah Payments.

I'm really confused with the terms used in the agreement. At first, it states that the loss will be shared between Customer and Bank based on each party's contribution. What I understand from this is that since in an event of abandonment of the project, it is likely to happen within the first 5 years of the project. Hence, in the early stages of the agreement, the Bank should be the one who's holding a bigger stake in the agreement.

However, the subsequent point states that the Customer needs to pay the Bank based on what has been disbursed by the Bank. There seems to be 2 conflicting points in the agreement from my understanding.

According to Mahadzir's reply to my email, MM concept has not been tested in court. Hence a base case can't be established on what it will be like in case of abandonment. There is possibility that the judge will just annulled the so-called MM contract (because the partnership's validity is highly suspected) and apply the equity principle is always there. He also attached an article entitled "Shari'ah and legal issues of musharakah mutanaqisah" by Adam Ng. Please read the article for better understanding of the implications. The conclusion of this article is rather interesting which states "It is not the permissibility of MM contracts per se, but their indiscreet use, faulty structuring and ‘window dressing’ which are igniting the perception that MM is no different from BBA, or, worse still, conventional home-financing".

Perhaps there are still lots to be done in order to get a perfect Islamic home financing concept which really adheres to the principal of Shariah and protects the interest of house buyers.

Tribute to Mahadzir Ahmad for his great effort in promoting Islamic Finance. Wallahu'alam