Credit Rationing: Issues and Questions

Can Islamic injunctions indemnify the structural flaws of securitized debt?

“…Propositions to reduce adverse selection in contracts include screening (Broecker, 1990), multi-period contracting (Hosios and Peters, 1989), and credit rationing (Baltensperger, 1978). However, credit rationing leads to increased price of the loans (Jaffee and Russell, 1976), which eventually results in financial exclusion of poor borrowers.…”

“…For reducing the effects of moral hazard, the literature suggests various propositions including instilling rights to protect return to both parties (Hart, 1988), credit rationing (Baltensperger, 1978), and iron-clad covenants (Smith and Warner, 1979). Also, in the securitization process, originators are required to retain the risky residual tranche as a 'first loss position' or as 'skin-in-the-game' incentive, so as to absorb any expected loss.…”

Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?

“…We assume the existence of an information architecture and optimally price mortgages (in the spirit of Baltensperger (1978)) to contrast the one made by the housing finance cooperative with that of a formal intermediary in the prime sector. This is accomplished in a more scientific way instead of using the ad-hoc credit rationing constraints currently used by banks.…”

“…First, we optimally price both the formal (fixed rate − prime sector) mortgage as well as the cooperative home mortgage. The term "price" in our paper is used in a broad sense (consistent with Baltensperger, 1978) to include not only the interest rate (as in the formal mortgage) but also the loan-to-value ratio as well as the tenure of the facility (see also Eisdorfer, 2008). Our pricing algorithm is more scientific than the ad-hoc credit rationing constraints used currently by banks.…”

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

“…Once it is established, it needs to be managed carefully for it to be self-sustaining. 43 We assume the existence of an information architecture and optimally price mortgages (in the spirit of Baltensperger (1978)) to contrast the one made by the housing finance cooperative with that of a formal intermediary in the prime sector. This is accomplished in a more scientific way instead of using the ad-hoc credit rationing constraints currently used by banks.…”