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

M. Shahid Ebrahim

A formal home loan is onerous to subprime borrowers in efficient markets. This can deter homeownership for financially strapped individuals, leading to a market failure. This paper proposes a special form of cooperative mortgage financing (practiced in Oman) to overcome this market failure. We integrate the literature of Mortgage Design with that of informal savings schemes (i.e., ROSCAs/ ASCRAs) to illustrate that this mode of financing dissipates credit risk better than the formal mode of financing. It is also resilient to volatility of interest rates and allows prepayments without any additional charges. Finally, we verify the assertions of Besley et al. (1994), and Hart and Moore (1998) that cooperative mortgages are to formal mortgages in special cases.

Mots clés: C63 (Computational Techniques); I31 (Welfare and Poverty Basic Needs); O17 (Formal and Informal Sectors; Institutional Arrangements); P13 (Cooperative Enterprises); ASCRA; Asset Bubble; Mutual Bank; Inflation; Mortgage Design; and ROSCA; G21 (Banks; Mortgages); G32 (Financing Policy; Capital and Ownership Structures)

Domaines: Économie et finance quantitative [q-fin]

M. Shahid Ebrahim. Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?. Journal of Economic Behavior and Organization, 2009, 72 (3), pp.864. ⟨10.1016/j.jebo.2009.08.002⟩. ⟨hal-00723634⟩