Alternate Proposal for Interest Free House Finance

Salman Ahmed Shaikh ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Mortgages; House Finance; Personal Finance; Islamic Banking; Options; Diminishing Musharakah; Lease (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2014-01-01
New Economics Papers: this item is included in nep-ara and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53804

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