What is it about?
In this paper, we revisit the design of interest free house finance and provide an alternative arrangement which is much more transparent, flexible and egalitarian from the perspective of clients.
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Why is it important?
Islamic leases are relatively more expensive to the customers. The risk assumed by Islamic banks is hedged completely with unilateral undertaking which brings forth questions of transparency and substance in offering a meaningfully different interest-free solution. This paper provides an alternative which takes care of these concerns.
Perspectives
In the alternate design, the Islamic bank buys the house by paying the house owner full amount of the house upfront. Then, the bank gives the house on rent to the client and the Islamic bank also enters into an options contract as the call option writer. If the call buyer does not exercise the call option, the options contract expires and the Islamic bank is in a position to give the house on rent again. We present numerical examples of computing rents in two separate structures. In structure I, call option is used with the lease contract. In structure II, house is resold at market price with stated price floor.
Dr Salman Ahmed Shaikh
Islamic Economics Project
Read the Original
This page is a summary of: Alternate Proposal for Interest Free House Finance, SSRN Electronic Journal, January 2012, Elsevier,
DOI: 10.2139/ssrn.2398378.
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