MurabahaandMusharakah Moutanaquissahpricing: an interest-free approach

Abstract

Purpose This study aims to provide an interest-free valuation methodology for Murabaha and Musharakah Moutanaquissah contracts. Indeed, In Islamic finance, Murabaha contracts are widely negotiated. Their yield depends mainly on the contracted profit margin. In the current practices, this latter is based on a reference interest rate, which is highly criticized in Islamic literature, just like Musharakah Moutanaquissah contracts. In this perspective, authors suggest a new valuation methodology with parameters related to the real economy. Design/methodology/approach The authors apply an indirect method to determine a lower bound of the profit margin of a Murabaha contract. Considering Musharakah Moutanaquissah as an equivalent contract, the new valuation methodology is based on participation and focuses on parameters from the real economy: the market rent and the rate of return used for an equivalent project. Findings The results show that the pricing of Musharakah Moutanaquissah contracts could be based on several parameters linked to the real economy. Consequently, an implied value of the profit margin could be computed. Also, the interest rate is no longer implicated in the pricing of neither Murabaha nor Musharakah Moutanaquissah contracts. Research limitations/implications The valuation methodology is applicable only if the underlying asset’s financing can be made with Murabaha and Musharakah Moutanaquissah contracts. Practical implications This work will restore the link between Islamic contracts and the real economy. For Islamic banks in particular, the suggested model would reduce the exposure to reputational risk and enhance the compliance to the Sharia (Islamic Law). Originality/value Several studies have analyzed the dependence between Islamic contracts and interest rates. In general, these studies confirm this dependence and few of them have suggested alternatives. Thus, the authors contribute to the literature by providing a practical and applicable model to detach the valuation of Murabaha and Musharakah Moutanaquissah from the interest rate.

Akad Murokab on the DSN-MUI Fatwa and its Effect on Islamic Bank Funding Products

“…To be precise, the combination of contracts could lead to the hidden or justifiable 'ribā' like using a hibah agreement to hide a profit guarantee in the muḍārabah contract (Ishak, 2020). Muneeza (2020) suggests that homeownership financing in Malaysia uses multiple contracts, including al-murābah lil amir bi al-syirā and Musyārakah Mutanāqiṣah, which combine mushārkah, ijārah wa'ad tuma bay' and ijārah contracts, Ahroum (2020). Both multi-contracts include multi-contracts permitted by Sharia because they do not fall into the element of usury.…”

“…Khan (2013) says that hybrid contracts are allowed as long as there are no elements of usury, gharar, and mayisīr. Khan's opinion is reinforced by Muneeza (2020) and Ahroum (2020), who state that multiple contracts are allowed as long as they do not contain elements of usury. Imam Sastra (2018) suggests that numerous agreements are allowed as long as there is no qarḍ contract that can lead to the aspect of usury.…”

The economic reality of Islamic banks’ transactions: a qualitative inquiry

“…However, the presence of any genuine trading profit in a Murabaha transaction is questionable. Ahroum et al (2020) argue that Islamic contracts are impacted by the presence of interest in the economic system, and this impact is seen mainly is the use of interest rate (Libor, Euribor, etc.) as a benchmark for profitability, which is required by Islamic financial institutions (p. 201).…”

Subjective Meaning of Strategic Pricing Decision Making based on Islamic Values in the Muslim Business community

“…Some previous studies, such as Septiarini (2017), Aman (2020), and (Ali et al, 2013), only mentioned a little in the theory discussion. Many researchers have conducted Islamic pricing research for financial asset products (e.g., Ahroum et al, 2020;Rama, 2020;Sabah & Hassan, 2019;Uddin et al, 2020).…”