Determining the viability of rental price to benchmark Islamic home financing products

Yusof, Rosylin Mohd; Kassim, Salina; Majid, M. Shabri Abd.; Hamid, Zarinah

doi:10.1108/14635771111109823

Cited by 29 publications

(14 citation statements)

References 21 publications

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“…However, there have been some controversies involving BBA because of the use of the base lending rate as the benchmark for interest rates (Ariff and Rosly, 2011). Similarly, some scholars criticise the use of interest rates as benchmark in Murabahah contracts (Mohd Yusof et al, 2011;Sairally, 2002). Because of the controversial use of interest rates, Islamic banks started to adopt other Islamic concepts such as Musharakah Mutanaqisah (MM), Ijarah Muntahiya Bit Tamlik (IMBT) and Istisna.…”

Section: Introductionmentioning

confidence: 99%

Islamic Contracts for Home Financing: A Comparative Analysis

Yustiardhi¹,

Aulia²,

Permatasari³

2019

IJMAR

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Home financing is widely needed by many people across different countries. Through the years, Islamic banks have developed several models for home financing to address the growing demand from customers. Two products that Islamic banks use extensively are Murabahah and Bay Bithaman Ajil (BBA) which in practice have similar characteristics to their conventional counterparts, which leads to criticism from Islamic scholars. Alternative Islamic home financing schemes that have been introduced to the market in recent years include Musharakah Mutanaqisah (MM), Ijarah Muntahiya Bit Tamlik (IMBT) and Istisna. These three financial products have different features that could overcome the weaknesses of Murabahah and Bay Bithaman Ajil. However, these three financial contracts are not without limitations. This paper provides a theoretical overview of these contracts. Further studies should discuss more practical issues that could promote the use of these contracts.

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Section: Introductionmentioning

confidence: 99%

Islamic Contracts for Home Financing: A Comparative Analysis

Yustiardhi¹,

Aulia²,

Permatasari³

2019

IJMAR

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“…Therefore, to mitigate from those sudden increase in real estate price and to avoid from fluctuate in interest rate due to asset price bubbles, we suggesting that the authorities should consider to enhance the role of financial institutions either Islamic nor conventional in providing a stable rate and always ensuring the conduct of Islamic financial system following the Shariah guidelines. For instances, a few studies on Islamic financing suggest Islamic commercial real estate financing to use Sukuk (Parsa & Muwlazadeh, 2013); rental rate as the pricing of Islamic home financing (Yusof, Kassim, Majid, & Hamid, 2011).…”

Section: Discussionmentioning

confidence: 99%

Islamic Financial Institutions and Real Estate Cycle

Harun

Wahab

Yusof

2018

IPJAF

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The role of Islamic financial intuitions is essential in providing Islamic financing specifically to investors and stakeholders to invest in real estate. Therefore, understanding the link of the real estate cycle to the financial institutions is crucial. This is because the real estate cycle is one of the critical elements that will affect financing decisions and strategies of the banking sectors. Hence, this paper employed meta-analysis which aims (1) to systematically review survey the growing literature on real estate cycle and its links to the financial institutions; (2) to highlight possible cross-country trend analysis financial strategy among investors in dealing in with the real estate cycle. The results of the study suggest that during the peak cycle or period of crisis, most investors are risk-averse and increase the risk to the financing of real estate as well. This real estate cycle that occurs almost every 10 years in conventional real estate sectors also give some consequences to the Islamic financial institutions. This paper suggests to investors to understand the real estate cycle and its impact on Islamic financial institutions.

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“…Several studies suggest the use of a rental index as a benchmark for this key parameter in the valuation of MM contracts (Meera and Abdulrazzaq, 2009;Mohd Yusof et al, 2011Yusof et al, 2016). These studies highlight the stability of the rent versus the interest rate and its correlation with economy.…”

Section: Rentmentioning

confidence: 99%

MurabahaandMusharakah Moutanaquissahpricing: an interest-free approach

Ahroum¹,

Touri²,

Achchab³

2020

JIABR

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Purpose This study aims to provide an interest-free valuation methodology for Murabaha and Musharakah Moutanaquissah contracts. Indeed, In Islamic finance, Murabaha contracts are widely negotiated. Their yield depends mainly on the contracted profit margin. In the current practices, this latter is based on a reference interest rate, which is highly criticized in Islamic literature, just like Musharakah Moutanaquissah contracts. In this perspective, authors suggest a new valuation methodology with parameters related to the real economy. Design/methodology/approach The authors apply an indirect method to determine a lower bound of the profit margin of a Murabaha contract. Considering Musharakah Moutanaquissah as an equivalent contract, the new valuation methodology is based on participation and focuses on parameters from the real economy: the market rent and the rate of return used for an equivalent project. Findings The results show that the pricing of Musharakah Moutanaquissah contracts could be based on several parameters linked to the real economy. Consequently, an implied value of the profit margin could be computed. Also, the interest rate is no longer implicated in the pricing of neither Murabaha nor Musharakah Moutanaquissah contracts. Research limitations/implications The valuation methodology is applicable only if the underlying asset’s financing can be made with Murabaha and Musharakah Moutanaquissah contracts. Practical implications This work will restore the link between Islamic contracts and the real economy. For Islamic banks in particular, the suggested model would reduce the exposure to reputational risk and enhance the compliance to the Sharia (Islamic Law). Originality/value Several studies have analyzed the dependence between Islamic contracts and interest rates. In general, these studies confirm this dependence and few of them have suggested alternatives. Thus, the authors contribute to the literature by providing a practical and applicable model to detach the valuation of Murabaha and Musharakah Moutanaquissah from the interest rate.

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Determining the viability of rental price to benchmark Islamic home financing products

Cited by 29 publications

References 21 publications

Islamic Contracts for Home Financing: A Comparative Analysis

Islamic Contracts for Home Financing: A Comparative Analysis

Islamic Financial Institutions and Real Estate Cycle

MurabahaandMusharakah Moutanaquissahpricing: an interest-free approach

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