Connceptual analysis of Islamic home financing models

الملخص EN

This paper examines the properties of Islamic home financing models, including the mushÉrakah mutanaqiÎah partnership (MMP), bayÑ bi thaman Éjil (BBA) and Zubair Diminishing Balance Methods (ZDBM).

The conceptual study uses the financier’s outstanding balance as a general theoretical framework for a comparative analysis of these models.

It is shown that differences in the structure and dynamics of balances have a bearing on the speed of ownership transfer.

There is a trade-off between the convenience of fixed installments and faster speed of ownership transfer rates relative to payment ratios.

Fixed installments, while more convenient, are conducive to relatively slower speeds of ownership transfer.

In contrast, higher installments in earlier periods may be prohibitive, but have the effect of increasing the relative speed of ownership transfer.

It is possible to derive hybrid models with a balanced mixture of Islamic home financing modes where the recourse is made to both murÉbaÍah and mushÉrakah principles to govern the rights and obligations of contractual parties.

This hybrid modelling constitutes an attempt to eliminate compounding, preserve customer’s rights to optimal rates of ownership transfer, secure financier’s rights to legitimate profits and meet preferences for either constant or variable installments.

The various needs and preferences can hardly be met with a single home financing model.

This conceptual analysis suggests that there is a need for greater transparency and better assessment of the inherent risks and trade-offs associated with various financing models.

It is the liberty of choice between options of financially equivalent schemes that can be conducive to informed and rational decisions.

Given the diversity of stakes and the overriding importance of public interest, perhaps no single model represents a viable long-term solution on its own.

A full set of Islamic home financing options however may.