Contingent convertible Ijara pricing model

Ons Triki and Fathi Abid

International Journal of Islamic and Middle Eastern Finance and Management, 2024, vol. 18, issue 2, 311-332

Abstract: Purpose - This study aims to conceive and develop a pricing model for the Ijara contingent convertible contract (ICCC, hereafter), considering the possibility that the lessee may default. The ICCC model grants the lessor the option of converting the unpaid amount into equity or recovering the leased equipment and selling it at market price in case of financial distress. Design/methodology/approach - The ICCC is consistent with the profit-sharing approach and the new risk management techniques, which are compatible with Islamic philosophy. Relying on real options theory and the contingent claim approach, a closed-form solution of the firm’s assets is developed in a dynamic environment, where the rate of return is generated by a Cox-Ingersoll-Ross stochastic process. Findings - Examining the numerical analysis reveals the impact of the firm value, the conversion or sell decision and the conversion ratio and volatility on the ICCC value. The value of the ICCC can increase substantially as the value of the firm approaches the conversion threshold. The conversion ratio as well as the asset market price play equally an important role in the decision to convert or sell. Originality/value - This paper develops a pricing model for a contingent Ijara contract, which incorporates a conversion option to mitigate the lessee’s credit risk during periods of economic instability. The ICCC is a cooperative strategy that would be advantageous to all parties, including the lessor and lessee. In the event of a conversion, businesses may be able to continue operating thanks to this financial innovation, and the lessor may profit from the company’s recovery by freeing up more resources for the use of more profitable ventures.

Keywords: Ijara contingent convertible contract; Conversion rate; Cox-Ingersoll-Ross stochastic process; Risk management; Capital structure (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-03-2024-0142

DOI: 10.1108/IMEFM-03-2024-0142

Access Statistics for this article

International Journal of Islamic and Middle Eastern Finance and Management is currently edited by Dr Syed Aun Raza Rizvi

More articles in International Journal of Islamic and Middle Eastern Finance and Management from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().