POTENTIAL OF SMART CONTRACT TECHNOLOGY IN THE OPERATION OF HOUSING FINANCING PRODUCTS BASED ON MUSHARAKAH MUTANAQISAH

Abstract

A smart contract is a script that encodes and executes the terms of a contract or transaction on a blockchain platform. This technology offers a practical mechanism for delivering Islamic banking products. Smart contracts can be utilized for Islamic home financing, specifically to implement the diminishing partnership (musharakah mutanaqisah) structure. This arrangement has seen a decline in use, largely due to the rise of tawarruq contracts which benefit from more developed systems and facilities. Reassessing and redeploying the diminishing partnership model via smart contracts could reduce the industry’s heavy reliance on tawarruq in Islamic banking operations. Accordingly, this study evaluates the potential of smart contract technology to execute diminishing partnership agreements, especially within the context of housing finance offerings. We adopt a qualitative approach to achieve this aim, drawing on thematic analysis of prior studies and synthesizing findings through narrative methods. Our results indicate that smart contracts can serve as an effective operational mechanism for diminishing partnership-based home financing, thanks to automated workflows, enhanced transaction transparency, and improved risk management. However, these advantages can only be fully realized if the technological, operational, and Sharia-related risks are properly identified and controlled.