The main purpose of this paper is to provide a comprehensive review of mushārakah mutanāqisah (MM; diminishing partnership) technique and its potentials for Islamic financial institutions.
Based on an extensive literature review, this paper aims to highlight, explain and discuss the basic principles underlying implementation of MM and its distinctive features when compared to other modes of finance.
Islamic banks, throughout the years, developed several modes of finance which are more or less similar to their conventional counterparts. In fact, al‐Bayc bithaman al‐ājil (BBA) and murābahah are the two instruments most commonly used by Islamic banks and financial institutions. Investment and financing through the profit and loss sharing instruments is almost nonexistent within the Islamic financial system. MM technique is an alternative financial instrument available for Islamic banks. It is a relatively new and very little used product available for Islamic banks. The paper claims that MM is more in line with Shari'ah teachings and as such should be used more by Islamic financial institutions. The study indicates that MM possibly has a comparative advantage for both financier and the customer when compared with conventional loans and BBA.
As a relatively new and untested mode of finance, the paper offers a theoretical overview only. Further studies should discuss more practical issues that keep banks away from utilizing MM more efficiently.
The comprehensive overview of the MM and underlying issue discussed in this paper is a very good foundation for further studies on the topic. It gives a clear theoretical base for practical implementation of MM.
