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Riba in La-riba contracts: where to turn in Islamic home financing?

Hasan, Zubair (2011): Riba in La-riba contracts: where to turn in Islamic home financing?

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Abstract

The Musharakah Mutanaqisah Partnership model or the MMP is fast gaining popularity in Islamic home financing, for jurists and the bankers both validate it as a totally interest free structure. We have exploded the myth of thatvalidation in our earlier writings and reinforce our argument here . But on a more important side, we shall show that the construct, which some now refer to as the Zubair Diminishing Balance Model or the ZDBM, is cheaper for the customer without reducing in any way the profit margin for the bankers; Instead, it provides them with a competitive edge over their mainstream rivals at zero cost. The model is more efficient: it uses fewer resources, the rate of return on investment remaining unchanged. Liquidity in the system is improved and social cause is served as the price of a basic human need is lowered. In contrast, the MMP is complicated, implies compound interest in practice, and is prune to Shari’ah frowns. ZDBM is especially fairer in the treatment of default related issues. It also does not invite the tensions which rental determination/revision or property valuation creates in the MMP programs. In this context the paper refers as illustrations to actual cases from some countries where MMP is gaining ground. The innovation of charging on diminishing balance may usher in revolution in finance.

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