PRICING ASSET BACKED ISLAMIC FINANCIAL INSTRUMENTS

Muhammed-Shahid Ebrahim ()
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Muhammed-Shahid Ebrahim: Department of Management Studies, FMAS, University of Brunei Darussalam, Bandar Seri Begawan 2028, Brunei Darussalam;

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 01, 59-83

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.

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 (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1142/S0219024900000048

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