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Pricing Asset Backed Islamic Financial Instruments

Author

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  • MUHAMMED-SHAHID EBRAHIM

    (Department of Management Studies, FMAS, University of Brunei Darussalam, Bandar Seri Begawan 2028, Brunei Darussalam;
    School of Building and Real Estate, FABRE, National University of Singapore, 4 Architecture Dr., 117566, Singapore)

Abstract

The social impact of bankruptcies and loan defaults result in structural impairment of the economy. This paper presents a judicious methodology for pricing durable asset backed financing facilities while reducing their risk of default. Although the framework of the study is that of an Islamic banking system, it can also be implemented by conventional intermediaries. Both credit as well as hybrid (quasi-equity) facilities in the form ofBai' Bithman Ajil(BBA)/Ijara wal-'Iqtinaand DecreasingMudharabah(DM) instruments are discussed using computer simulation. These are applied to the cases of automobile financing and home mortgages. Placingadditional assetsasRehn(security) has the capacity to improve the financing ratio and/or the term to maturity of both kinds of vehicles.

Suggested Citation

  • Muhammed-Shahid Ebrahim, 2000. "Pricing Asset Backed Islamic Financial Instruments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 59-83.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:01:n:s0219024900000048
    DOI: 10.1142/S0219024900000048
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    Keywords

    Bai' bithaman ajil(deferred installment sale); Ijara wal-'Iqtina(lease purchase); decreasingmudharabah(hybrid security pledging share in income from asset/project); JEL classification code: G21; JEL classification code: G32; JEL classification code: P43;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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