Islamic home financing at a crossroads: evaluating current models and proposing a shariah-compliant alternative
Burhan UluyolPurpose
Islamic home financing offers an alternative to conventional mortgages by adhering to Shariah principles that prohibit interest and promote asset-backed, risk sharing financing. Despite its intentions, existing Islamic home financing models are faced with structural and operational challenges, particularly in ownership transfer and pricing mechanisms. This study aims to critically compare various Islamic home financing models – e.g. Bay’ Bithaman Ajil (BBA), Musharakah Mutanaqisah (MM), Tawarruq and Parallel Istisna’ – assessing their contractual structures, pricing mechanisms and compliance with Shariah principles.
Design/methodology/approach
This study conducts an in-depth library research analysis, exploring various Islamic home financing models with a particular focus on their structures and pricing mechanisms, and proposes an alternative Islamic home financing model.
Findings
One of the main issues is the regulatory restriction on Islamic banks directly owning properties for resale, which questions the genuineness of trade-based contracts. Another point is that most Islamic house financing structures are pegged to interest-based benchmarks, which compromises their uniqueness compared to conventional loans. To address these issues, this study proposes a novel Musawamah-Based Direct Property Sale Model that excludes reliance on interest-based pricing, ensures direct ownership transfer and enhances financial sustainability through a structured installment-based purchase agreement between the developer and homebuyer.
Originality/value
The findings have significant policy implications for policymakers, Islamic financial institutions and homebuyers as they demand regulatory reforms that enhance the legitimacy and effectiveness of Islamic home financing. By bridging the gap between Shariah compliance and operational implementation, this study contributes to the literature on Islamic finance reforms and offers a transparent, risk-sharing and ethical model of homeownership.