FREE ELECTRONIC LIBRARY - Dissertations, online materials

Pages:   || 2 | 3 |

«ISLAMIC BENCHMARKING: AN ALTERNATIVE TO INTEREST RATE (Evidence from Home Financing in Malaysia) Ali Rama1 Wisnu Wardhana, Farid Kurnia Rahman, Ilham ...»

-- [ Page 1 ] --



(Evidence from Home Financing in Malaysia)

Ali Rama1

Wisnu Wardhana, Farid Kurnia Rahman, Ilham Reza Ferdian2


Applying interest rate is not only prohibited under shariah rule, but also made a world crisis.

Similar to conventional, Islamic banking nowadays uses the same component to determine cost of capital in home financing. Islamic scholars then come out with rental rate as replacement of interest rate. This paper attempts to discuss the possibility of using rental rate as the basis in Musharakah Mutanaqisah Partnership (MMP) calculation. Furthermore, this study does comparison between interest rate mortgage and Islamic Musharakah Mutanaqisah and proves that rental rate is better than interest rate in terms of home financing. The result shows that rental rate is lower than interest rate and will vary for each type and location of the house. This study also finds that rental rate tends to be higher in urban areas or close to urban areas. The result of correlation analysis shows that rental rate has positive weak correlation to interest rate. Another interesting fact that emerged from this study is the rental rate tends to be more stable when compared to the interest rate, even in condition of financial crisis in 1997/1998. However, single story in Kuala Lumpur has negative correlation and condominium in Kuala Lumpur has strong correlation to interest rate. Thus we believe that rental rate can be used as an alternative to interest rate for home financing because it reflects the market value of the house and beneficial to society. This paper hopefully is useful for the progress of Islamic banking in the world in terms of implementation of rental rate as a financial product innovation and also an alternative to interest rate.

Keyword: Interest rate, rental rate, musharakah mutanaqisah.


Corresponding Author. Post-graduate student of International Islamic University Malaysia (IIUM). Email:

rama_clb_ku@yahoo.com. Mobile: +60126832319 2 All are Postgraduate Students of International Islamic University Malaysia (IIUM).


1. Introduction Owning a house is a main goal for many people. To fulfill this goal, people build a home in their own, purchasing it or renting it from others. For some people, however, it is quite difficult to buy a house in cash regarding the price of the house showing an increase trend. As a solution and possible way to own a house is buying a house in deferred payment.

Currently many banks concern in offering home financing because the demand for this financing tends to increase as well as people’s income tends to increase.

In conventional banks, conventional home mortgages are, of course,interest-based.

They use interest rate as a basis to price their financing cost. Because the interest rate is always fluctuate depending on the condition in the financial world for the conventional banks the interest rate which they charged to the customer is also fluctuate. It will make sense when the customer should pay their payments in different amount for each month depends on the interest rate at the month he makes the payment. But in current situation, conventional banks for some cases use a fixed rate to attract more customers to take their home financing product. In this type of contract, the bank will charge the customer in a fixed rate for each month.

Islamic financial institutions then come out with their own way for home ownership which is shariah compliant. For some countries like Malaysia, Indonesia and Brunei, Bai Bithaman ‘Ajil (BBA) contract is the most familiar contract used for home financing. But many scholars look this type of contract is the same like conventional home mortgage. The Middle Eastern Shariah Scholars disapprove of the BBA contract, citing that it is similar to the conventional loans. Indeed that, the theory of finance predicts that the Islamic modes like the BBA will converge with its conventional counterpart due to the law-of-one-price. This convergence has caused Islamic finance to evolve greatly, from being a “profit-and-loss” banking to fixed-rate murabahah financing, and now towards a floating rate financing mode (Kameel and Abdul Razak 2005).

For central bank of Malaysia, for example, has approved a “floating-rate” BBA where the customer pays a monthly installment amount that is on the higher end, but thereafter gets a rebate based on the prevailing market interest rate. Indeed many BBA customers have shown dissatisfaction over its implementation (Kameel and Abdul Razak 2005).

To address the issue of “not-shariah-enough” in BBA contract, some shariah scholars and professionals introduce the Diminishing Musharakah contract, or known as Musharakah Mutanaqisah Partnership (MMP) contract. MMP has become an important issue for them in Islamic finance. For many scholars, MMP looks more “Islamic” rather than BBA. Rosly 2 (2007) argued that MMP is a way to do away with the problem of choice in uncertainty for home financing.

Muhammad Taqi Usmani basically agreed on the implementation process of the Musharakah Mutanaqisah Partnership. They agreed that the product could help the people to rely less on other financing facilities such as the BBA Muraabahah, ect (Kameel and Abdul Razak 2005).

MMP is a financing technique which involves the concept of undivided ownership of the asset by the partners, which is called Musha’a. The MMP actually is a diminishing partnership concept. Under this contract, the bank and the customer are the owner of each and every part of jointly property on a pro rate basis. Kameel and Abdul Razak (2005) described that there are two portions on the MMP contract. First, the customer enters into a partnership (musharakah) under the concept of ‘Shirkat al-Milk’ (joint ownership) agreement with the bank. Second, the bank then leases its share in the house ownership to the customer under the concept of ijarah, i.e. by charging rent; and the customer agrees to pay the rental to the bank for using its share of the property.

Ayub (2008) stated that to ensure the shariah compliant, the sequencing of the

contract should be:

1. A contract between partners to create a joint ownership. The client partner (the customer) makes a promise (wa’ad), before or the lease arrangement is finalized, to purchase the share of the financier partner (the bank),

2. The financier partner (the bank) gives units of his share to the client on lease,

3. The client partner goes on purchasing the units of ownership of the financier partner as his promise.

MMP will be looked the same with the conventional home financing if the bank still use Base Lending Rate (BLR) as their basis to calculate the expected profit, even they cover it as a profit rate. Even it is just a matter of numbers but when the bank use BLR as their calculation basis, the MMP then will begin from the wrong “star”. Many people, especially professionals, argued there is nothing wrong if we have an expected rate of return same with BLR in conventional banks, because the intention (niat) of the expected rate of return is as our expected profit margin, not as interest.

Another issue which comes out in MMP home financing is the same expected rate of return which is charged to all customers. For some scholars, the use of the same expected rate of return is seems not be “Islamic”. It is because one of the main principles in Islamic 3 financial system is to spread the wealth. When the bank charges the same profit to all customers, it means they will charge the same profit rate to the customer whether the customer take the home financing in luxurious areas (rich customers) or urban areas (poor customers). Even though the value of the financing will be different, it looks unfair if the bank give the same treatment between the rich and the poor. This issue raise when Islamic banks still use BLR as their basis to calculate their profit rate.

Some scholars then offer a rental rate as the basis to calculate MMP. This idea seems logic in the term of Islamic finance sense when the Islamic banks want to calculate MMP. By using rental rate, the bank will treat differently between the rich who can afford the house in luxurious areas and the poor who just can afford the house in urban areas. This is because each area has their rental rate.

Kameel and Abdul Razak (2005) compared between Bay’ Bithaman ‘Ajil (BBA) and Musyarakah Mutanaqishah Partnership (MMP). They argued that the MMP contract is a better Islamic financing alternative for long durations compared with the BBA contract.

While the BBA is only popular in countries like Malaysia, Indonesia and Brunei, it has proven to be quite unsatisfactory to the customers and bankers.

They also made a comparison between interest rates and average gross rental yields for properties in Kuala Lumpur for the period 1984 to 2005, whereby it was seen that rental yields for all categories of the houses are generally lower than the BLR and average lending rate. Only condominiums have shown higher rental yields than market interest rates. This implies that the bank may use the MMP for properties that have high rental potential only.

When this is not feasible for the bank, when rental rates fall short of interest rates, the MMP model can be implemented though cooperatives, which can also be an investment avenue for members.

In this paper will try to explore the use of rental rate in MMP home financing calculation, the comparison between the use of rental rate and interest rate in home financing, and also the feasibility of rental rate to be used in MMP home financing as an alternative to the interest rate.

2. The al-Bay’ bi-Thaman ‘Ajil (BBA) Contract Literally, Bay’ bi-Thaman ‘Ajil means sale on the deferred payment of price or deferred payment sale. This type of sale, where the price is deferred, is also known as bay’ almu’ajjal, bay bi-al-nase’ah, bay al-takher and bay’ bi-al-ta’jil wa taqsit (Tarmidzi, 207).

4 Kameel and Abdul Razak (2005) define BBA that is basically a sale contract which provides the buyer the benefit of a deferred payment, whereby the deferred price of the sale object carries an additional profit. It is an extension of the murabahah (cost plus) contract, whereby the commodity exchanged is “delivered” immediately but the sale price (with profit) is paid in installments, over a long period (the murabahah itself being generally for short period). While the BBA is widely used in Malaysia, Indonesia, Brunei and few other counties, it has been subjected to much controversy among the fuqaha’ worldwide regarding its permissibility; whereby most scholars in the Middle East have rejected it.

In the conventional system, home financing is interest based which is forbidden in Islam. The current BBA home financing, however, does not alter much of the above equation.

Instead of charging the customer interest, financiers charge a profit derived through a buyand-sell contract which is permitted in Islam. But regretfully, the profit rate is dependent on the market interest rate due to arbitrage activities. Therefore, while the BBA is practiced as shariah compliant in some countries, it is, nonetheless, converging close to the conventional mode where the computational formula are similar to the conventional and where the profit rate tracks the market interest rate (Kameel and Abdul Razak, 2005).

Currently, BBA carried out with several innovations such as implementing the floating rate over the fixed rate in order to compete with conventional banks. This makes the Bank Negara Malaysia (BNM) to allow the implementation of the BBA floating rate where the customer pays the installment according to the agreement that when the interest rate is higher than BBA rate and customers will have a discount if the BBA rate higher than interest rate.

The BBA has taken a huge blow, referred as not-shariah compliant or unjust instrument sees as hilah (forbidden structure) which opens the back door to riba. The BBA implementation in Malaysia is much criticized because it looks not much different with the conventional system. The main reason is a contract that precedes BBA which is called Bay’ al-Inah. It is that may jurist consider invalid, seen as a legal device to overcome the prohibition of riba as the motive behind the sale is to get a loan with interest.

Another implication of the BBA contract is that people could not distinguish between the products of Islamic banks and the conventional banks. And finally, people will judge that the Islamic and the conventional banks are substantially the same.

–  –  –

Another form of musharakah is being used to provide housing mortgages by forming a musharakah between the financier and the customer who own the real estate jointly. This contract is commonly known as Musharakah Mutanaqisah Partnership (MMP) or “diminishing partnership.” The Musharakah Mutanaqisah Partnership (MMP) financing is a contract of partnership with declining ownership as one of the solution of BBA financing in uncertainty condition. The MMP consists of two contracts – one musharakah and the other ijarah. As compared to an ijarah-based mortgage where the ownership of the house remains with the lessor/owner for the entire lease period, ownership in a diminishing partnership is explicitly shared between the customer and the financier. As indicated by the name, the ownership of the financier diminishes over time as the customer purchases a share with each monthly payment. The periodic payments of the customer can be divided into two parts; one paying a proportionate rental to the financier based on the financier’s share of the property and the other, equity contribution to buy out the financier’s share of the equity. Gradually, over time, the customer is able to buy out the financier’s share and thus acquires complete ownership of the property.

Kameel and Abdul Razak (2005) describe that Customer pays, for example, 10% as the initial share to co-own the house whilst the bank provides for the balance of 90%. The customer will then gradually redeem the financier’s 90% share at an agreed portion periodically until the house is fully owned by the customer. Second, the bank leases its share (90%) in the house ownership to the customer under the concept of ijarah, i.e. by charging rent; and the customer agrees to pay the rental to the bank for using its share of the property.

Pages:   || 2 | 3 |

Similar works:

«Chapter 2 The Two Daughters of Lot (Genesis 19:1-38) Your daughter is headstrong? Keep a sharp lookout that she does not make you the laughing stock of your enemies, the talk of the town, the object of common gossip, and put you to public shame. Sirach 42:11 Introduction The story of Lot and his two unmarried daughters is, chronologically, the first of four narratives about daughters and fathers to be analysed and discussed in this thesis. Compared with the stories of Jephthah‟s daughter and...»

«Taiwan Journal of Linguistics Vol. 8.2, 63-86, 2010 CLAUSAL INTEGRATION AND THE EMERGENCE OF MITIGATIVE  AND ADHORTATIVE SENTENCE-FINAL PARTICLES IN CHINESE Foong Ha Yap, Jiao Wang, Charles Tsz-kwan Lam ABSTRACT This paper identifies a number of different pathways that give rise to sentence final particles in Chinese. In particular, it focuses on a strategy referred to as ‗clausal integration‘. Diachronic evidence is given for the emergence of sentence final particles er yi yi and ye yi...»

«Instruction for use 1stQ AddOn® IOL Intraocular lens for implantation into the ciliary sulcus This IFU is available electronically on our website. Please visit: www.1stQ.eu Content: Sterile foldable one piece spherical intraocular lens (AddOn IOL) for single use consisting of highly purified hydrophilic acrylate with covalently bounded UV absorber. Some of the lenses are manufactured optionally with covalently bounded yellow chromophore as blue light filter. Description: This intraocular lens...»

«THE HOLY BOOK OF NUMBERS OT101 Coptic Orthodox Diocese Of The Southern United States COMMENTARY ON THE HOLY BOOK OF NUMBERS Written by Dr. Medhat S. Ibrahim 1 THE HOLY BOOK OF NUMBERS OT101 The Census of the Sons of Israel: Moses, Aaron, and the heads of the twelve secular tribes of Israel counted all of the men of Israel above the age of twenty who could go out to war by tribe. The number totaled 603,550 men excluding the Levites who were not included in the census God commanded Moses to take....»

«THÈSE Pour obtenir le grade de DOCTEUR DE L’UNIVERSITÉ DE GRENOBLE Spécialité : Physique des matériaux Présentée par Giovanni ALTAMURA Thèse dirigée par Henri MARIETTE et codirigée par Louis GRENET et Simon PERRAUD préparée au sein du CEA INAC, Equipe Nanophysique et Semiconducteurs (NPSC) dans l'École Doctorale de Physique, UJF Développement de cellules solaires à base de films minces Cu2ZnSn(S,Se)4 Thèse soutenue publiquement le 2 Septembre 2014 devant le jury composé de :...»

«CHEMERINSKYESSAY.AUTHORCHANGES2.DOC 11/3/2003 12:04 PM SEPARATE AND UNEQUAL: AMERICAN PUBLIC EDUCATION TODAY * ERWIN CHEMERINSKY TABLE OF CONTENTS Introduction I. Separate and Unequal Schools II. The Cause: The Lack of a Unitary System III. Creating a Truly Unitary System of Education Conclusion INTRODUCTION The focus of this conference is on the legacy of Brown v. Board of 1 Education, as it approaches its fiftieth anniversary, and of San Antonio 2 Indep. School Dist. v. Rodriguez, exactly...»

«SC R I B E of HE AV E N The New Century Edition of the Works of Emanuel Swedenborg Jonathan S. Rose Series Editor Stuart Shotwell Managing Editor EDITORIAL COMMITTEE Wendy E. Closterman Lisa Hyatt Cooper George F. Dole David B. Eller Robert H. Kirven† Sylvia Shaw Alice B. Skinner SC R I B E of HE AV E N Swedenborg’s Life, Work, and Impact Essays contributed by George F. Dole, David B. Eller, Olle Hjern, Robert H. Kirven, Jean-François Mayer, Frank S. Rose, Jonathan S. Rose, Alice B....»

«Before the Federal Communications Commission Washington, D.C. 20554 Petition for Rulemaking to Amend the ) Commission’s Rules to Promote Expanded Free ) Access to Local Broadcast Television Stations ) RM 11752 Via Over-the-Air Reception, Internet Streaming, ) Or Other Means ) OPPOSITION OF THE NATIONAL ASSOCIATION OF BROADCASTERS August 14, 2015 Table of Contents I. INTRODUCTION II. MEDIACOM’S PETITION IS GROUNDED IN MULTIPLE UNSUPPORTED AND INACCURATE ASSERTIONS III. MEDIACOM’S PROPOSAL...»

«FIVE GOLDEN RAYS Five Articles by Mao Tse Tung with Commentaries Table of Contents Serve the People Commentary on Serve the People In Memory of Norman Bethune Commentary on In Memory of Norman Bethune The Foolish, Old Man Who Removed the Mountains Commentary on The Foolish Old Man Who Removed the Mountains. 24 Combat Liberalism On Correcting Mistaken Ideas in the Party Commentary on Correcting Mistaken Ideas in the Party Serve the People September 8, 1944 Our Communist Party and the Eighth...»

«PRODUCT MONOGRAPH Pr COMBIVENT® RESPIMAT® Ipratropium Bromide and Salbutamol Inhalation Solution (as Ipratropium Bromide Monohydrate and Salbutamol Sulfate) Each actuation delivers a dose of 20 mcg of ipratropium bromide and 100 mcg of salbutamol COMBIVENT® RESPIMAT® cartridge for use only with the COMBIVENT® RESPIMAT® Inhaler BRONCHODILATOR Boehringer Ingelheim (Canada) Ltd. Date of Revision: 5180 South Service Road June 27, 2016 Burlington, Ontario L7L 5H4 Submission Control No: 192183...»

«Responsible Energy Costs in Higher Education and Further Education – Stage One (RECSO) Final Report November 2010 Authors: David Aeron-Thomas d.aeron-thomas@forumforthefuture.org Martin Bennett mbennett@glos.ac.uk Peter James peterj@dsl.pipex.com Zoe Le Grand z.legrand@forumforthefuture.org Contact Person: Martin Bennett Contents 1 Acknowledgements 2 Executive Summary 3 Background 4 Aims and Objectives 5 Methodology 6 Implementation 7 Potential mechanisms 8 Outputs and ResultsDesk Research 9...»

«Distributed Computing Column 60 Annual Review 2015 Jennifer L. Welch Department of Computer Science and Engineering Texas A&M University, College Station, TX 77843-3112, USA welch@cse.tamu.edu As with prior December issues, this issue is devoted to a review of notable events related to distributed computing that occurred during the year. First, congratulations to Michael Ben-Or and Michael O. Rabin who received the 2015 Dijkstra Prize for starting the field of fault-tolerant randomized...»

<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.