Hire Purchase Musharaka Mutanaqasa (HPMM)
Hire Purchase Musharaka Mutanaqasa (HPMM) Introduction, Theory and Application
Mode of Investment in Islamic Banking
Hire Purchase Musharaka Mutanaqasa (HPMM) is one of the most revolutionary structures in Islamic finance. It’s not just a mouthful—this model bridges the gap between Shariah principles and modern asset financing. Think of it as a perfect blend of partnership, leasing, and ownership—all wrapped into a single ethical contract.
So, what makes HPMM stand out? In simple terms, it’s a diminishing partnership agreement where the bank and customer co-own an asset. Over time, the customer gradually buys out the bank’s share while paying rent for the portion still owned by the bank. Let’s dig in.
Core Concepts of HPMM
What is Musharaka?
Musharaka is a joint venture where two or more parties invest capital in a project and share profits (and losses) based on agreed ratios. It’s all about mutual trust and cooperation.
What is Mutanaqasa?
Mutanaqasa means “diminishing” or “declining.” Here, it refers to the customer slowly acquiring the full ownership of the asset from the bank.
Role of Hire Purchase
Hire purchase adds a leasing element. While the customer doesn’t fully own the asset initially, they use it in return for monthly rent, eventually gaining complete ownership.
How HPMM Works
Step-by-Step Breakdown
- Joint Purchase: The bank and customer jointly buy an asset.
- Usage: The customer uses the asset and pays monthly rent to the bank.
- Buyout: Over time, the customer buys small portions of the bank’s share.
- Full Ownership: At the end of the term, the customer becomes the full owner.
Key Stakeholders
- Islamic Bank: Provides capital, owns part of the asset.
- Customer: Co-owner, pays rent, and gradually buys the asset.
Ownership Transition
Ownership moves from bank to customer gradually, unlike conventional finance where it happens all at once.
Components of HPMM Contract
Capital Contribution
The bank contributes a major chunk of the capital; the customer may also provide a down payment.
Profit and Loss Sharing
In case of asset-related loss, both parties bear it proportionally. Rent is the bank’s profit.
Rental Agreement (Ijara)
Rent is paid for using the bank’s portion of the asset—aligned with Shariah.
Purchase Undertaking
A side agreement where the customer agrees to buy the bank’s share gradually.
Legal and Shariah Compliance
Fatwa and Juristic Approvals
HPMM is endorsed by leading Islamic scholars and follows AAOIFI and IFSB standards.
Key Shariah Rules
- No interest (riba)
- Risk-sharing
- Real asset involved
- No uncertainty (gharar)
Types of Assets Financed Through HPMM
Real Estate
Perfect for buying homes or commercial properties.
Vehicles
Cars, bikes, trucks—you name it!
Equipment and Machinery
Especially useful for SMEs needing business tools.
Differences Between HPMM and Traditional Leasing
|
Feature |
HPMM |
Traditional Leasing |
|
Ownership |
Gradual transfer |
Lessor always owns |
|
Riba |
None |
Often involved |
|
Shariah Compliance |
Yes |
No |
|
Risk |
Shared |
On lessor only |
Benefits of HPMM
- ✅ Fully Shariah-compliant
- ✅ Encourages savings and ownership
- ✅ Fair risk and profit-sharing
- ✅ Flexible and transparent
Challenges of HPMM
- Legal documentation is complex
- Misinterpretation of Shariah concepts
- Banks need trained staff
- Customers may not fully understand terms
HPMM vs Conventional Hire Purchase
|
Element |
HPMM |
Conventional |
|
Interest |
Not allowed |
Primary revenue |
|
Risk |
Shared |
Bank bears little |
|
Ethics |
High |
Varies |
|
Ownership |
Gradual |
At end only |
Global Adoption of HPMM
Countries like Malaysia, Pakistan, UAE, and Saudi Arabia have integrated HPMM into their Islamic banking systems. Major banks like Maybank Islamic and Meezan Bank offer HPMM housing products.
Regulatory Guidelines
AAOIFI Standards
Govern the structure and contracts used in HPMM.
Local Rules
Each country applies its own regulatory framework. In Bangladesh, the Shariah Supervisory Board gives the final green light.
Role of Islamic Banks in Promoting HPMM
- Launching new products
- Conducting workshops and seminars
- Partnering with real estate developers
- Creating mobile apps for customer awareness
Practical Example
Let’s say you and the bank co-purchase a $100,000 home.
- Your share: 20% = $20,000
- Bank’s share: 80% = $80,000
- Monthly rent: Based on bank’s 80%
- Monthly buyout: $1,000 per month
Each month, your share increases, bank’s decreases, rent drops accordingly. After ~6.5 years, the house is entirely yours!
Future of HPMM in Islamic Finance
- AI and fintech will automate documentation and tracking
- Potential to reduce housing crisis in Muslim-majority countries
- Youth-friendly with flexible terms and affordable start
Conclusion
Hire Purchase Musharaka Mutanaqasa (HPMM) isn’t just another financial tool. It’s a Shariah-compliant bridge to ownership—giving you access to homes, vehicles, and more, without compromising your beliefs.
It encourages saving, ownership, and financial responsibility in a way that’s ethical and sustainable. With more awareness, regulation, and education, HPMM could become a cornerstone of global Islamic finance.
FAQs
- What is the difference between Musharaka and HPMM?
Musharaka is a general partnership, while HPMM adds leasing and gradual ownership to the structure.
- Is HPMM only for Muslims?
Not at all. Anyone can benefit from the transparent and ethical nature of HPMM.
- Can HPMM be used for car financing?
Yes! Many banks offer car financing through the HPMM structure.
- How is the rent calculated in HPMM?
Rent is based on the bank’s remaining share in the asset and agreed rental rate.
- What happens if the client defaults?
Depending on the contract, penalties are structured fairly and without violating Shariah rules.
Markup Based
Bai Muazzal
Bai Murabaha
Bai Salam
Bai Istisna
Rental Based
Izara
Hire Purchase/Izara Bill Baia
Hire Purchase Musharaka
Mutanaqasa (HPMM)
Hire Purchase Shirkatul
Melk (HPSM)
Sharing Based
Mudaraba
Musharaka
Rental Based Finance
Ijara Bil Baia/ Hire Purchase
Ijara Muntahia Bittamlik
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM) means purchasing and acquiring ownership of asset by sharing in equity and paying rents for the rest of the equity held by the Bank or other party. It is a synthesis of three contracts:
Musharaka Mutanaqasa or Shirkat or Shirkatul Melk.
Ijarah
Sale
Under this mode, the Bank and the customer on contract basis jointly purchase vehicles, machineries, building, apartment etc. The customer uses the portion of the assets owned by the bank on rental basis and acquires the ownership of the same assets by way of paying banks portion of the equity on the assets on installments together with its rents as agreed upon.
Key Features
- An agreement is executed between Hiree (Bank) and Hirer (Customer) stipulating the actual prices, monthly rents, price of the bank’s portion of the asset, payment schedule and installment amount and the nature of the security etc.
- Bank rents out its own portion of the asset to the customer under the terms & conditions of agreement and the customer.
- In Hire Purchase under Musharaka Mutanaqasa Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognized. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them, jointly or in the name of any third party, clearly mentioning the same in the Hire Purchase Musharaka Mutanaqasa Agreement.
- The customer (Hirer) pays off bank’s portion of equity in installments as per the terms and conditions of the agreement.
- As the ownership of hired portion of the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Customer) against the specific benefit, the rent is not considered as price or part of price of the asset.
- In the HPSM agreement Hiree does not sell or Hirer does not purchase the asset but they promise to sell and purchase the same part by part only.
- Ownership of asset transfer to sole owner from joint ownership.
- The customer acquires full ownership of the asset after payment of the entire dues of the bank.
- Bank will not share the loss of business as this is not the mode of sharing profit or loss.
- Even though if a loss is incurred due to Act of Allah, the loss may be shared as per agreed ratio.
Fixation of Rent
- Rent will be fixed as per agreement between Bank and Customer.
- Rent on rent cannot be charged.
- Rent will be paid from the date only upon the asset is in usable condition.
- Any default of paying rent will increase the total rent.
- Charging of rent on grace period is highly objectionable as the asset is not generating income.
- Rent may be charged in gestation period if the asset is delivered in useable condition.
- Bank may recover the loss of gestation period by increasing the rate of rent for the remaining period or by revaluing the asset of the completion of the grace period.
- The amount of rent will be decreasing proportionately with the decrease of hirer’s ownership and increase of hirer’s ownership on asset as per Diminishing Balance Method.
Differences among Ijara, Hire Purchase and Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
- HPMM is not only hire purchase but also it is the sharing of ownership.
- As HPMM/HPSM is sharing of ownership it differs with the conception of single ownership of asset purchase like Ijara.
- HPMM/HPSM is the sharing of ownership on asset not sharing of profit or loss like Musharaka.
- HPMM/HPSM is not diminishing Musharaka as the mentioned method implies the sharing of ownership not sharing of profit.
- The question of sharing of loss will only arises out from ownership risk.
- This ownership of risk will arise out only under act of Allah.