COVID-19 and Resilience of Islamic Home Financing: Enhanced Musharakah Mutanaqisah (EMM) Model as an Example

Abstract

The majority of economic crises impact the wealth of people which in turn affect their financial capacity to purchase residential properties. However, the home financing method may also have an impact on the behaviour of house prices. This chapter intends to test argued resilience of Islamic finance to situations of financial crisis by using an Islamic home financing product called Enhanced Musharakah Mutanaqisah (EMM) which was proposed by Asadov and Ibrahim (2018) as an example and compare its performance to conventional mortgage. Two different models of home financing, conventional and EMM based ones are developed with the former reflecting basic features of conventional mortgage and the latter using rental rates and house price indices for product pricing. Both models are compared using aggregate data for the US housing market for the past 30 years in order to demonstrate the resilience of the EMM model. The findings of the study show that EMM is more flexible in terms of reflecting real situations in both the housing market and aggregate economy as compared to the conventional model. Its pricing is more accommodating particularly during times of economic downturns, and it can potentially provide the solution to numerous mortgage defaults arising from such conditions. Despite the proposed models being tested using data only from the United States, the analysis can be generalized for other countries as well. The implementation of the EMM model, as an example of Shariah-based Islamic financial product, is expected to bring fairness and justice in the relationship between financial institutions and its clients. To the best of our knowledge, this is the first attempt of simulating a Musharakah Mutanaqisah based home financing using both actual rental rates and house prices for product pricing.

Citation

Asadov, A.I. (2022), "COVID-19 and Resilience of Islamic Home Financing: Enhanced Musharakah Mutanaqisah (EMM) Model as an Example", Hassan, M.K., Muneeza, A. and Sarea, A.M. (Ed.) Towards a Post-Covid Global Financial System, Emerald Publishing Limited, Leeds, pp. 71-90. https://doi.org/10.1108/978-1-80071-625-420210004