Purpose –This paper seeks to contribute to the banking and housing market literature by proposing analternative measure of rate of return for Islamic banks that is based on the rental rate of the property.This alternative Islamic mortgage pricing mechanism could be adopted by Islamic banks as areplacement for mortgage rates if it is found to be independent from any form of interest rates asrequired by Islamic law.Design/ methodology/ approach -By investigating the short run and long run dynamics betweenrental price index (RPI) and our proposed Islamic Rental Rate (RR-I) and, three selectedmacroeconomic indicators in the UK via Autoregressive Distributed Lag Model (ARDL), we examinethe link between (RPI) ,(RR-I) and the real economy.Findings - Our findings provide evidence that while Rental Price Index (RPI) in the UK issignificantly related to three leading macroeconomic variables namely GDP, REER and interest ratesmeasures while Rental Rate (RR-I) is only impacted by changes in GDP. More, importantly we showthat there is no short or long run dynamics between the rental rate and any form of interest rates.Practical implications - Since Rental Rate is not linked to the macroeconomic determinants, it istherefore more stable, resilient and sustainable and at the same time, making the financing less riskyfor both parties as they are less susceptible to economic vulnerabilities.Social Implications- Some calculations incorporating our proposed RR-I can also be extended to thepricing of products based on other contracts such as Tawarruq, Bai Bithaman Ajil or even Murabahahto for a fairer and just pricing to both the banks and customers.Originality / Value – Our results suggest that Islamic banks should consider incorporating ourproposed rental rate(RR-I) when pricing their home financing products as this will lead to lessdependence on interest rates for benchmarking. In addition, utilizing the proposed rental rate (RR-I)reduces the exposure to the subjective evaluation by property valuators and speculativemacroeconomic elements.
|Number of pages||26|
|Journal||International Journal of Housing Markets and Analysis|
|Publication status||Published - 3 Oct 2016|