Diminishing Musharaka versus conventional mortgages

A conventional financier will see a number of parallels between a conventional mortgage and a Diminishing Musharaka product. For example, the acquisition of the financier’s share at a fixed cost would appear to be a repayment of the financier’s capital. The rent payable by the customer under the lease would appear to be the interest on the financier’s capital. However, below is a selection of the main differences between a Diminishing Musharaka product and a conventional mortgage.

Sharia requirements for landlords

Sharia requires a landlord (i.e. the financier under the lease) to be responsible for major maintenance and repair and insurance in respect of its share of a property. Such responsibilities are not undertaken by financiers of a conventional mortgage. Under Sharia, the customer (as lessee) is responsible for ordinary maintenance and repair only of the leased property and for remedying major defects caused by deliberate or reckless acts of the customer. In many Diminishing Musharaka products, the financier will therefore (as landlord) appoint the customer as its service agent to undertake major maintenance and repair and procure insurance on behalf of the financer in return for a service agent fee. The payment by the financer of the service agent fee invariably has an upward effect on the rent payable by the customer under the lease.

Issues for landlords under English law

As the financier is a landlord pursuant to the lease, it retains the risks that pertain to such status under English law. Therefore, if a customer fails to fulfil its maintenance and repair obligations and the financier (as landlord) exercises its rights under the lease to carry out such works, the financier will owe a duty of care to all persons who might reasonably be expected to be affected by defects in the sate of the property. Furthermore, if the financier is at any point considered to have control over any parts of the property (perhaps only relevant when the financier enforces its security or the lease is forfeited by the financier), it will owe a duty of care to see that visitors will be reasonably safe in the property for the purpose for which they were invited or permitted to be there. Moreover, there are potential environmental risks for the financier as the ultimate owner of the property if it has not undertaken proper environmental due diligence or procured appropriate covenants from the customer.