Sustainable Housing Finance Through Islamic Contracts: A Comparative Study of Murabaha Vs. Diminishing Musharakah Models

Abstract Access to reasonably priced and environment-friendly housing financing continues to be a major problem particularly in countries with the majority Muslim populations where adherence to Islamic financial principles is mandated. This study looks at two often used Islamic financing techniques, Murabaha and Diminishing Musharakah, and contrasts them in the effort to provide practical solutions for sustainable housing finance. This study adopts a comparative descriptive research design which allows for the systematic comparison between the two different Islamic financing models within the context of sustainable housing finance. Supported by descriptive and inferential statistical studies, a cross-sectional survey of financial institutions and customers looks at the relative performance of the models regarding cost, risk-sharing, sustainability, customer happiness, and operational simplicity. The results show that Murabaha mirrors traditional debt agreements and impedes efficient risk sharing even if it is easy and has lower operating risks. On the other hand, Diminishing Musharakah has shown better results in terms of affordability, equity sharing, customer happiness, and long-term feasibility despite its higher administrative complexity. According to the finding from the regression analysis, financing models have a significant impact on the outcomes of sustainable housing finance; the variance in promoting affordability and socio-economic welfare was higher with Diminishing Musharakah. Thus, it is recommended that Islamic financial firms should prioritize equity-based financing models and reduce operational challenges through client education initiatives and digitization. Additionally, regulatory agencies are urged to encourage the implementation of risk-sharing frameworks in order to promote financial inclusion and socioeconomic progress. This research advances the empirical evidence on sustainable Islamic finance that supports Diminishing Musharakah for environment-friendly and ethical housing development in accordance with international Sustainable Development Goals (SDGs).