Musharakah is an Arabic word meaning “partnership.” In Islamic home financing, it refers to a co-ownership arrangement in which a financier and homebuyer jointly purchase a property. It is a form of halal homeownership in the United States. Guidance Residential uses a Diminishing Musharakah model of co-ownership.
What Does “Diminishing Musharakah” Mean?
“Diminishing” describes the financier’s share, which decreases with each payment. The full term in Arabic is Musharakah Mutanaqisa, which means “diminishing partnership.”
This is the structure behind Guidance Residential’s Declining Balance Co-ownership Program.
How Does Musharakah Work?
When a homebuyer uses a Musharakah-based program, the homebuyer and the financier buy the property together. Then the buyer gradually acquires the financier’s share through monthly payments, with no interest involved.
Each month, the homebuyer makes monthly payments that do two things:
- Compensate the financier for use of their ownership share
- Purchase more of that share over time
Over the course of the contract, the homebuyer’s stake grows and the financier’s shrinks, until the homebuyer owns 100% of the property.
Two Kinds of Musharakah
There are two kinds of Musharakah partnership arrangements.
- Shirkat al-’aqd is a business partnership in which both partners share effort, decisions, and responsibility daily. It is used for joint business ventures.
- Shirkat al-milk is co-ownership of an asset in which one party holds a share while the other lives in and maintains the home. This is the form used for home financing.
Guidance uses Shirkat al-milk because the company does not utilize the home. This means the homeowner is the one who handles maintenance, property taxes, etc. The homeowner also keeps all of the appreciation as the home’s value increases.
How Is a Musharakah Mortgage Different From a Conventional Mortgage?
In a conventional mortgage, a bank lends money and charges interest (riba). The homebuyer is a borrower who owes a debt.
In a Musharakah mortgage, there is no loan and no interest. The financier and homebuyer are co-owners and partners. Risk is shared. For example, in the case of damage to the property due to a natural disaster, both parties bear the loss together.
Is Musharakah Halal?
Yes, Musharakah is halal. It is one of the most widely accepted structures in Islamic finance. It avoids riba by replacing interest with a profit arrangement tied to real co-ownership of an asset.
Guidance’s model was developed with the help of six top international Islamic scholars, and it continues to be overseen and audited by an independent Shariah Supervisory Board of internationally recognized scholars.
Is It Recognized by U.S. Financial Institutions?
Yes. Guidance Residential’s Declining Balance Co-ownership Program is regulated by the U.S. government the same way conventional mortgages are. It is backed by Freddie Mac and Fannie Mae, the same institutions that back conventional mortgages.
Who Uses Musharakah Financing?
Nearly 45,000 families have bought their homes with Guidance’s Diminishing Musharakah program.
Most people who use Guidance’s Musharakah financing are Muslims who want to buy their home without riba, or interest. But it is available to people of all faiths who find the equitable co-ownership structure appealing.
