Financing micro and medium sized enterprises through decreasing partnership (Musharakah Mutanaqisah): Refining Shar’iah and banking aspects for enhanced applicability

MMEs can decrease partnership when acquiring assets and financing complete ventures as suggested by contemporary scholars. Increasing emphasis on equity participation will allow ancillary contracts of ijarah and sale to function independently. Instead of focusing on the calculation of the profit from the capital outlay, the realistic pricing of ijarah rentals and the units should be emphasized as the reality of the underlying contracts. Expenses of the business should be proportionally shared in businesses that are financed on decreasing partnership. This way, the bank’s stake in the business will dictate the profit share of the bank and the unit price of the bank’s share could be fixed after professional evaluation or could be negotiated at the time. The paper focuses on conditions that should be met for full Shari‘a compliance but that are violated in practice.