A critique of the diminishing balance method of Islamic home financing

Abstract EN

This paper criticizes a new ‘Islamic’ home financing model proposed in Hasan (2011a), “Islamic Home Finance in the Social Mirror”, that appeared in ISRA International Journal of Islamic Finance, Vol.

3, Issue 1, pp.

7-24 and in another subsequent paper Hasan (2011b), “Riba in La-Riba Contracts: Where to Turn in Islamic Home Financing?”.

These papers argued that the Diminishing Balance method, which the author affectionately calls the Zubair Diminishing Balance Method (ZDBM), is superior to the Islamic musharakah mutanaqisah partnership (MMP) model, which the papers claim to be no better than its conventional riba-based counterpart.

The ZDBM is argued to be cheaper for the customer without being costlier to the bank.

Also at any point in time, the debt on a default date is argued to be smaller in the ZDBM model.

This paper discusses the fallacies in the arguments presented and shows that the ZDBM is similar to the conventional interest-based loan or, at best, similar to the murabahah-based bay bi thaman ajil (BBA).

Moreover, it is not cheaper, as claimed, but potentially more burdensome and increases the probability of default.

Hence the ZDBM would face similar problems to those encountered in BBA financing, particularly when it comes to early settlement; the balance of financing can even be more than the original financing amount.

The MMP model is indeed, therefore, superior to the ZDBM and is also Shariah-compliant without much ado.