Foundations of Islamic Finance series
Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad
Chapter 14: Islamic norms, Excel time value formula and housing finance models
This chapter adds to the series of writings on Islamic home financing presented and published by the author on the subject of compounding versus an Islamic Shari’ah-consistent requirement for computation to avoid continuous compounding. It spells out certain norms Islamic banks must observe in home financing, and demonstrates that the conventional time value formula in Excel does not meet the stated norms. It may well be emphasized that in Islam the question of observing these norms arises before, and not after, the selection of the formula. Additional juristic requirements may only follow subsequently. Is it not then strange that many Islamic banks are using the formula to determine the periodic instalment payments in their home financing programmes? The chapter finds, for example, the popular Musharakah Mutanaqisah Partnership (MMP) Islamic home financing model to be non-compliant with the stated norms. It presents a new model–the Zubair Diminishing Balance Method (ZDBM)–and argues that the alternative is not only fully observant but is superior to the MMP model on some other counts as well.
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