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Alternate Proposal for Interest Free House Finance

Author

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  • Shaikh, Salman

Abstract

In this paper, we present an alternate proposal for house finance. In our proposal, the Islamic bank buys the house paying the house owner the full amount of the house and becomes the owner. 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 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. We show that the proposal is robust in different scenarios. Furthermore, it is substantially and meaningfully different from conventional finance in form and substance.

Suggested Citation

  • Shaikh, Salman, 2014. "Alternate Proposal for Interest Free House Finance," MPRA Paper 53804, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53804
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    References listed on IDEAS

    as
    1. Ebrahim, M. Shahid, 2009. "Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 864-883, December.
    2. Hasan, Zubair, 2012. "Mortgage contracts in Islamic home finance: Musharakah Mutanaqisah program vs. Zubair diminishing balance model," MPRA Paper 39067, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Mortgages; House Finance; Personal Finance; Islamic Banking; Options; Diminishing Musharakah; Lease;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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