L’Observatoire des religions

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged ?

mardi 17 mars 2009 par Shahid Ebrahim

Abstract : A formal home loan is onerous to subprime borrowers in efficient markets. This can deter home ownership for financially strapped individuals, leading to a market failure. This paper proposes a special form of cooperative mortgage financing (practiced in Oman) to overcome this market failure. We integrate the literature of Mortgage Design with that of informal savings schemes (i.e., ROSCAs/ ASCRAs) to illustrate that this mode of financing dissipates credit risk better than the formal mode of financing. It is also resilient to volatility of interest rates and allows prepayments without any additional charges. Finally, we verify the assertions of Besley et al. (1994) and Hart and Moore (1998) that cooperative mortgages are pareto-superior to formal mortgages in special cases.

Shahid Ebrahim is professor : Chair in Financial Economics Nottingham University Business School Jubilee Campus, Wollaton Road Nottingham NG8 1BB United Kingdom

JEL Classification Codes : C63 (Computational Techniques) G21 (Banks − Mortgages) G32 (Financing Policy − Capital and Ownership Structures) I31 (Welfare and Poverty – Basic Needs) O17 (Formal and Informal Sectors ; Institutional Arrangements) P13 (Cooperative Enterprises)

Key Words : ASCRA, Asset Bubble, Mutual Bank, Inflation, Mortgage Design, and ROSCA.

Acknowledgments : This paper was refined during my sabbatical study at James Madison University (JMU). I appreciate the hospitality of JMU particularly that of Ehsan Ahmed. I have benefited from the critical comments of the participants of the seminars at James Madison University ; University of Birmingham ; University of Glasgow ; the 2006 Conference on Computing in Economics and Finance (in Cyprus) ; the 2007 IIUM International Conference (in Malaysia) ; at the 2007 Workshop on Default Risk and Financial Distress (in Rennes, France), the 2007 Product Development and Management Association Conference (in Bangalore, India) ; the 2008 International Conference on Business and Finance (in Hyderabad, India) ; the 2008 International AREUEA Conference (in Istanbul, Turkey) ; the 2008 Workshop of European Network of the Economics of Religion (in Edinburgh, UK) ; and the 2008 Symposium on Religion, Markets and Society (in Nottingham, UK) on earlier drafts of the paper. I am also grateful to the following individuals for their helpful suggestions : Abdullah Al-Ghazali, Eyhab Al-Hajj, Aaref Al-Lawati, Bruce Brunton, Humayon Dar, Mohammad Omar Farooq, Diana Mitlin, Kelly Morris, Peter Oliver, J. Barkley Rosser Jr., Peer Smets, Ghulam Sorwar, Rafal Wojakowski and Robert Young. All remaining errors are mine.

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