Pricing Asset Backed Islamic Financial Instruments

Ebrahim, Muhammed-Shahid

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 of Bai' Bithman Ajil (BBA)/Ijara wal-'Iqtina and Decreasing Mudharabah (DM) instruments are discussed using computer simulation. These are applied to the cases of automobile financing and home mortgages. Placing additional assets as Rehn (security) has the capacity to improve the financing ratio and/or the term to maturity of both kinds of vehicles.

Citation

Ebrahim, M. (2000). Pricing Asset Backed Islamic Financial Instruments. International Journal of Theoretical and Applied Finance, 3(1), 59-83. https://doi.org/10.1142/s0219024900000048

• Journal Article Type: Article
• Publication Date: 2000-01
• Deposit Date: Sep 25, 2014
• Journal: International Journal of Theoretical and Applied Finance
• Print ISSN: 0219-0249
• Electronic ISSN: 1793-6322
• Publisher: World Scientific Publishing
• Peer Reviewed: Peer Reviewed
• Volume: 3
• Issue: 1
• Pages: 59-83
• DOI: https://doi.org/10.1142/s0219024900000048
• Public URL: https://durham-repository.worktribe.com/output/1453634