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Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?

  • Ebrahim, M. Shahid

A formal home loan is onerous to subprime borrowers in efficient markets. This can deter homeownership for financially strapped individuals, leading to a market failure. This paper proposes a special form of cooperative mortgage financing (practiced in Oman) to overcome this market failure. We integrate the literature of mortgage design with that of informal savings schemes (i.e., ROSCAs/ASCRAs) to illustrate that this mode of financing dissipates credit risk better than the formal mode of financing. It is also resilient to volatility of interest rates and allows prepayments without any additional charges. Finally, we verify the assertions of Besley et al. (1994) and Hart and Moore (1998) that cooperative mortgages are pareto-superior to formal mortgages in special cases.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 72 (2009)
Issue (Month): 3 (December)
Pages: 864-883

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Handle: RePEc:eee:jeborg:v:72:y:2009:i:3:p:864-883
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