Rental index rate as an alternative to interest rate in Musharakah Mutanaqisah home financing

Yusof, Rosylin Bt Mohd; Mahfudz, Akhmad Affandi; Arif, Ahmad Suki Che Mohamed; Ahmad, Nor Hayati

doi:10.1108/imefm-11-2015-0141

Cited by 14 publications

(9 citation statements)

References 18 publications

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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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Section: Rentmentioning

confidence: 99%

MurabahaandMusharakah Moutanaquissahpricing: an interest-free approach

Ahroum¹,

Touri²,

Achchab³

2020

JIABR

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“…At the same time, it would remain competitive with the conventional banking as the rates are comparable, without relying on and being benchmarked against the interest rates. (Yusof, Mahfudz, Arif, & Ahmad, 2016) From the interview, it was found that MM Home Financing is offered to both the housing projects under construction and the completed houses. As the risk taken by the bank in offering MM Home Financing for houses under construction is higher, the bank is stricter and more careful in choosing the house developer before giving the customers the contract.…”

Section: Recommendationsmentioning

confidence: 99%

Why Islamic Banks Are Reluctant to Offer Musharakah Mutanaqisah for Home Financing: The Case of Maybank Islamic and Affin Islamic Bank

Zaaba¹,

Hassan²

2019

TUJISE

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This paper focuses on the challenges faced by the Malaysian Islamic Banks in implementing Musharakah Mutanaqisah (MM) Home Financing. Even though the study is specifically on the Malaysian Islamic banks, but the issues and recommendations addressed in this study are also pertinent to other Islamic banks across the world since they are also offering it. Drawing upon in-depth semi-structured interviews with the senior officers in two leading Islamic banks in Malaysia, one is the bank which terminated its MM Home Financing products however the other one continues to offer it. Knowing the contradicting perspectives of both banks gives insight of the real challenges faced by them in offering MM for home financing which are advance rental and the system's incapability to capture the unique nature of MM, and at the same time to know the motivation of offering it i.e. product diversification and comprehensive risk mitigation. This paper concludes by making recommendations that may be adopted by Islamic banks and the regulators to facilitate the promotion of MM Home Financing. Notably, this paper offers empirical findings which are different from the previous literature.

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“…Musharakah Mutanaqisah (MM) is a diminishing partnership concept that comprises three contracts which are Musharakah (partnership), Ijarah (renting) and Bay` (sales) (Abdullah, 2016;Smolo and Hassan, 2011;Yusof et al, 2016). This hybrid contract has been defined by Bank Negara Malaysia (BNM) as "a contract of partnership that allows one (or more) partner(s) to give a right to gradually own his share of the asset to the remaining partners based on agreed terms" (BNM, 2010).…”

Section: Literature Reviewmentioning

confidence: 99%

“…One critique against BBA is its use of Bay-Al-Inah (buy-back sale), that is forbidden by majority schools of thoughts except by Shafi'is (Smolo and Hassan, 2011). As BBA financing is collateralized, Islamic banks earn more profits with less risk and efforts using BBA mode of finance (Abdullah, 2016;Smolo and Hassan, 2011;Yusof et al, 2016). …”

Section: Literature Reviewmentioning

confidence: 99%

“…According to Smolo and Hassan (2011: 247): "In case that the customer cannot pay even rent, then the property could be leased to the third party while the profit will be shared between the bank and the customer.". The stipulation and enforcement of Wa'ad goes against the guiding principles of Musharakah (Yusof et al, 2016), as any profit and loss should be shared by all partners unless it was caused by the clear negligence of one partner.…”

Section: Issue Of Stipulating Wa'ad During Defaultmentioning

confidence: 99%

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