CRITIQUE ON RISKS IN ISLAMIC HOME FINANCING
DOI:
https://doi.org/10.31436/ijema.v24i2.383Abstract
This article examines the housing and financing market in Malaysia and consequently investigates how risk impacts on the Rental Rate Index (RR-i), proposed as an alternative to interest rate in Islamic home financing by researchers in an earlier research. It looks at both inherent and market-wide categories of risks and variables used in deriving the rental rate in the pricing for Islamic home financing. Qualitative research methodology was used, adopting both descriptive and explanatory research design in analysing secondary data retrieved and also reviewing the literature on Islamic home financing. This approach analyses risks that affect determinants of the rental price, through causal or chain explanations between the variables used in the original RR-i research. The study found risks peculiar to the industry arising from Islamic financing contracts rendering potential rental price index a real challenge in maintaining solvency. Credit risk, market risk and operational risk forming part of the risk premium calculations in deriving the rental rate and economic indicators also have issues needing a more robust and resilient variables that will depict an exact measure of rental values. Specifically the research limitation include the longitudinal effects because the eight year analysis on house price and financing used in this investigation to measure change or stability over time is much constrained and may not be sufficient to witness real change occurring.
References
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Abdelaziz, Chazi and Lateef, A.M. Syed. “Risk Exposure During the Global Financial Crisis: The Case of Islamic Banks.†International Journal of Islamic and Middle Eastern Finance and Management 3, no. 4 (2010): 321-33.
Abelson, Peter, Roselyne Joyeux, George Milunovich, and Demi Chung. “Explaining House Prices in Australia: 1970-2003,†Economic Record: The Economic Society of Australia 81, no. 1 (August 2005): S96-S103.
Ahearne, Alan, G., Ammer, John, Doyle, Brian, M. Kole, Linda, S., Martin, Robert, F. “House Prices and Monetary Policy: A Cross Country Study.†Board of Governors of Federal Reserve System, International Finance Discussion Paper, Number 841, September, 2005.
Avery, R.B., R.W. Bostic, P.S. Calem, and G.B. Calem. “Credit Risk, Credit Scoring and the Performance of Home Mortgages.†Federal Reserve Bulletin, July 1996: 621-48.
Baffoe-Bonnie, J. “The Dynamic Impact of Macroeconomic Aggregates on Housing Prices and Stock of Houses: A National and Regional Analysis,†Journal of Real Estate Finance and Economics 17, no. 2 (1998): 179-97.
Bourassa, S.C., and P.H. Hendershott. “Australian Capital City Real House Prices, 1979-1993.†The Australian Economic Review 28, no. 3 (1995): 16-26.
Castro, V. “Macroeconomic Determinants of the Credit Risk in the Banking System: The Case of the GIPSI.†NIPE Working Paper, 2012.
Casualty Actuarial Society. Overview of Enterprise Risk Management. 2003.
Chiang, Ming-Chu, I-Chun Tsai, and Cheng-Feng Lee. “The Downside Risk of US and UK Housing Markets.†Journal of Real Estate Portfolio Management 18, no.3 (2012): 257-72.
Coyle, B. Risk Awareness and Corporate Governance. UK: Financial World Publishing, 2002.
De Oliveira Tavares, F., E.T. Pereira, and A.C. Moreira. “The Portuguese Residential Real Estate Market: An Evaluation of the Last Decade.†Pandeconomicus 6 (2014): 739-57.
Ejoh, Ndifon, Okpa, Inah, and Inyang, Ebong. (2014). The relationship and effect of credit and liquidity risk on bank default risk among deposit money banks in Nigeria. Research Journal of Finance and Accounting, Vol. 5, No.6.
Elgari, M.A. (2003). Credit risk in Islamic banking and finance. Islamic Economic Studies, Vol. 10, No.2.
Erdem, O., A. Coskun, and H. Oruc (2013). “A Survey-Based Analysis of the Housing Market in the Emerging Economy: The Turkish Case.†Emerging Markets Finance and Trade 49 (2013): 59-79.
Errico, L., and V. Sundararajan. “Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead.†International Monetary Fund Working Paper 02/192, IMF, Washington D.C. USA, 2002.
Frenz, T., and Y. Soualhi. “Takaful and Retakaful: Advanced Principles and Practices.†Islamic Banking and Finance Institute of Malaysia, Kuala Lumpur, Malaysia, 2010.
Gerlach, S., and W. Peng. “Bank Lending and Property Prices in Hong Kong.†Journal of Banking and Finance 29, no. 2 (2005): 461-81.
Glennon, D. “Estimating the Income, Price and Interest Elasticities of Housing Demand.†Journal of Urban Economics 25, no. 2 (1989): 219-29.
Goodhart, C.A.E., and B. Hofmann. “Do Asset Prices Help to Predict Consumer Price Inflation?†Manchester School Journal 68 (s1) (2008). SSRN: http://ssrn.com/abstract=242532.
Hair, J., A. Money, M. Page, and P. Samoel. Research Methods for Business. England, United Kingdom: John Wiley and Sons, 2007.
Han, Lu. “The Effects of Price Risk on Housing Demand: Empirical Evidence from US Markets.†PhD Dissertation, Rotman School of Management, University of Toronto, Ontario, Canada, 2008.
Hoffman, B. “The Determinants of Private Sector Credit in Industrialised Countries: Do Property Prices Matter?†Working Paper no. 108, Bank for International Settlements, Basel, 2001.
Hong, G., J. Khil, and B.-S. Lee. “Stock Returns, Housing Returns and Inflation: Is there an Inflation Illusion?†Asia Pacific Journal of Financial Studies 42 (2013): 511-62.
Hossain, B., and E. Latif, E. “Determinants of Housing Price Volatility in Canada: A Dynamic Analysis.†Applied Economics 41, no. 27 (2009): 3221-531.
How, C.Y., K.A. Janice, and V.P. Melina. “Islamic Financing and Bank Risks: The Case of Malaysia.†Thunderbird International Business Review 47, no.1 (2005): 75-94.
Hubbard, R.G., K.N. Kuttner, and D.N. Palia. “Are there Bank Effects in Borrowers’ Cost of Funds? Evidence from a Matched Sample of Borrowers and Banks.†The Journal of Business 75, no. 4 (2002): 559-81.
Ibrahim, Mansor, H. and Sufian, Fadzlan. “A Structural VAR Analysis of Islamic Financing in Malaysia.†A Studies in Economics and Finance, 2014, Vol. 31, Issue 4, 371-386.
International Organization for Standardization. Risk Management-Principles and Guidelines on Implementation. Geneva, Switzerland, 2008.
Islamic Financial Services Act (IFSA) 2013 (Act 759) and Orders. Selangor, Malaysia: International Law Book Services, 2013.
Kahf, M. “Basel II: Implications for Islamic Banking.†Paper presented at the 6th International Conference on Islamic Economics and Banking, Jakarta, Indonesia, 2005.
Kassim, S.H., S.M. Majid, and R.M. Yusof. “Impact of Monetary Policy Shocks on the Conventional and Islamic Banks in a Dual Banking System: Evidence from Malaysia.†Journal of Economic Cooperation and Development 30, no.1 (2009): 41-58.
Kathneman, D., and A. Tversky. “Prospect Theory: An Analysis of Decisions under Risk.†Econometrica 47, no. 2 (1979): 263-72.
Khan T. and Ahmed H. “Risk Management: An Analysis of Issues in Islamic Financial Industry.†IRTI Occasional Paper no.5 (2001).
Lahsasna, A. Q and A in Islamic Finance. Kuala Lumpur, Malaysia: CERT Publications, 2010.
Leung, C.K.Y., Y.C.F. Leong and S.K. Wong. “Housing Price Dispersion: An Empirical Investigation.†Journal of Real Estate Finance and Economics 32, no.3 (2006): 357-95.
Liebeg, D., and M.S. Schwaiger, M.S. “Determinants of Interest Rate Margin of Austrian Banks.†Financial Stability Report (2008): 104-16.
Liow, K.H., H. Zhu, D.K. Ho, and K. Dapaah-Addae. “Regime Changes in International Securitized Property Markets.†Journal of Real Estate Portfolio Management 11, no. 2 (2005): 147-65.
Li, M. “Factors Influencing Household Demand for Life Insurance.†MBA thesis, University of Missouri-Columbia, USA, 2008.
Louis, Henock, and A.X. Sun. “Long Term Growth in Housing Prices and Stock Returns.†Real Estate Economics 42, no. 3 (2013): 663-708.
Luo, Z., C. Liu, and D. Picken. “Granger Causality Among House Price and Macroeconomic Variables in Victoria.†Pacific Rim Property Research Journal 13, no. 2 (2007): 234-56.
Louziz, D., A. Vouldis, and V. Metaxas. “Macroeconomic and Bank-Specific Determinants of Nonperforming Loans in Greece: A Comparative Study of Mortgage, Business and Consumer Loan Portfolios.†Journal of Banking and Finance 36, no.4 (2012): 1012-27.
Khan, T., and H. Ahmed. “Risk Management: An Analysis of Issues in Islamic Financial Industry.†Occasional Paper no. 5, Islamic Research and Training Institute, Islamic Development Bank, 2001.
Mahfudz, A.A., N.H. Ahmad, R. Mohd. Yusof, A. Mohd. Naim, and A. Turkhan. “Restructuring Rental Rate Components to be more Innovative Sharia Compliance Product in Islamic Home Financing.†European Journal of Islamic Finance 1, no. 5 (2016): 1-6.
Merna, T., and F. Al-Thani. Corporate Risk Management. United Kingdom: John Wiley and Sons, 2009.
Miller, N., and L. Peng. “Exploring Metropolitan House Price Volatility.†Journal of Real Estate Finance and Economics 33, no. 1 (2006): 5-18.
Mirakhor, A. “Epistemology of Finance: Mitigating Risk.†Islamic Finance Review 2, no. 2 (2012): 7-10.
Mohd. Yusof, R. “Rental Rate as An Alternative Pricing for Islamic Home Financing: An Empirical Investigation on the UK Market.†International Journal of Housing Market and Analysis (forthcoming in 2016).
Obaidullah, M. Islamic Financial Services. Jeddah: Islamic Economics Research Centre, King Abdulaziz University, 2005.
Orhan, E., A. Coskun, and H. Oruc. “A Survey-Based Analysis of the Housing Market in an Emerging Economy: The Turkish Case.†Emerging Markets Finance and Trade 49, supplement 5 (2013): 59-79.
Pew Research Center. Muslim Americans: Middle Class and Mostly Mainstream. Washington, USA: Population Reference Bureau, 2007.
Ramli, R., M.N. Ismail, and A.Z.M. Shaarani. Issues in Islamic Finance from the Practitioners’ Perspective. Kuala Lumpur, Malaysia: IBFIM, 2013.
Schroeck, G. Risk Management and Value Creation in Financial Institutions. New Jersey, USA: John Wiley, 2002.
Schwab, R.M. “Real and Nominal Interest Rates and the Demand for Housing.†Journal of Urban Economics 13, no.2 (1983) 181-95.
Siddiqui, A. (2008). “Financial Contracts, Risk and Performance of Islamic Banking.†Managerial Finance 34, no. 10 (2008): 680-94.
Stevenson, S. “A Long Term Analysis of Housing and Inflation.†Journal of Housing Economics 9, nos.1/2 (2000): 24-39.
Stubbs, D. “Australia’s Housing Boom Ends – Is a Crash Around the Corner?†Australian Property Journal 38, no.7 (2005): 523-9.
Sundararajan, V. “Risk Measurement and Disclosure in Islamic Finance and the Implications of Profit Sharing Investment Accounts.†Proceedings of the 6th International Conference on Islamic Economics and Finance. Jakarta, Indonesia (2005): 23-4.
Tsatsaronis, K., and H. Zhu. “What Drives Housing Price Dynamics: Cross-Country Evidence.†BIS Quarterly Review (2004): 65-78.
Tu, Y. “Segmentation of Australian Housing Markets: 1989-98.†Journal of Property Research 17, no. 4 (2000): 311-27.
Van Order, R., and A. Dougherty, A. “Housing Demand and Real Interest Rates.†Journal of Urban Economics 29, no. 2 (1991): 191-201.
Von Greuning, H., and Z. Iqbal. Risk Analysis for Islamic Banks. Washinton D.C.: The World Bank, 2008.
Abdelaziz, Chazi and Lateef, A.M. Syed. “Risk Exposure During the Global Financial Crisis: The Case of Islamic Banks.†International Journal of Islamic and Middle Eastern Finance and Management 3, no. 4 (2010): 321-33.
Abelson, Peter, Roselyne Joyeux, George Milunovich, and Demi Chung. “Explaining House Prices in Australia: 1970-2003,†Economic Record: The Economic Society of Australia 81, no. 1 (August 2005): S96-S103.
Ahearne, Alan, G., Ammer, John, Doyle, Brian, M. Kole, Linda, S., Martin, Robert, F. “House Prices and Monetary Policy: A Cross Country Study.†Board of Governors of Federal Reserve System, International Finance Discussion Paper, Number 841, September, 2005.
Avery, R.B., R.W. Bostic, P.S. Calem, and G.B. Calem. “Credit Risk, Credit Scoring and the Performance of Home Mortgages.†Federal Reserve Bulletin, July 1996: 621-48.
Baffoe-Bonnie, J. “The Dynamic Impact of Macroeconomic Aggregates on Housing Prices and Stock of Houses: A National and Regional Analysis,†Journal of Real Estate Finance and Economics 17, no. 2 (1998): 179-97.
Bourassa, S.C., and P.H. Hendershott. “Australian Capital City Real House Prices, 1979-1993.†The Australian Economic Review 28, no. 3 (1995): 16-26.
Castro, V. “Macroeconomic Determinants of the Credit Risk in the Banking System: The Case of the GIPSI.†NIPE Working Paper, 2012.
Casualty Actuarial Society. Overview of Enterprise Risk Management. 2003.
Chiang, Ming-Chu, I-Chun Tsai, and Cheng-Feng Lee. “The Downside Risk of US and UK Housing Markets.†Journal of Real Estate Portfolio Management 18, no.3 (2012): 257-72.
Coyle, B. Risk Awareness and Corporate Governance. UK: Financial World Publishing, 2002.
De Oliveira Tavares, F., E.T. Pereira, and A.C. Moreira. “The Portuguese Residential Real Estate Market: An Evaluation of the Last Decade.†Pandeconomicus 6 (2014): 739-57.
Ejoh, Ndifon, Okpa, Inah, and Inyang, Ebong. (2014). The relationship and effect of credit and liquidity risk on bank default risk among deposit money banks in Nigeria. Research Journal of Finance and Accounting, Vol. 5, No.6.
Elgari, M.A. (2003). Credit risk in Islamic banking and finance. Islamic Economic Studies, Vol. 10, No.2.
Erdem, O., A. Coskun, and H. Oruc (2013). “A Survey-Based Analysis of the Housing Market in the Emerging Economy: The Turkish Case.†Emerging Markets Finance and Trade 49 (2013): 59-79.
Errico, L., and V. Sundararajan. “Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead.†International Monetary Fund Working Paper 02/192, IMF, Washington D.C. USA, 2002.
Frenz, T., and Y. Soualhi. “Takaful and Retakaful: Advanced Principles and Practices.†Islamic Banking and Finance Institute of Malaysia, Kuala Lumpur, Malaysia, 2010.
Gerlach, S., and W. Peng. “Bank Lending and Property Prices in Hong Kong.†Journal of Banking and Finance 29, no. 2 (2005): 461-81.
Glennon, D. “Estimating the Income, Price and Interest Elasticities of Housing Demand.†Journal of Urban Economics 25, no. 2 (1989): 219-29.
Goodhart, C.A.E., and B. Hofmann. “Do Asset Prices Help to Predict Consumer Price Inflation?†Manchester School Journal 68 (s1) (2008). SSRN: http://ssrn.com/abstract=242532.
Hair, J., A. Money, M. Page, and P. Samoel. Research Methods for Business. England, United Kingdom: John Wiley and Sons, 2007.
Han, Lu. “The Effects of Price Risk on Housing Demand: Empirical Evidence from US Markets.†PhD Dissertation, Rotman School of Management, University of Toronto, Ontario, Canada, 2008.
Hoffman, B. “The Determinants of Private Sector Credit in Industrialised Countries: Do Property Prices Matter?†Working Paper no. 108, Bank for International Settlements, Basel, 2001.
Hong, G., J. Khil, and B.-S. Lee. “Stock Returns, Housing Returns and Inflation: Is there an Inflation Illusion?†Asia Pacific Journal of Financial Studies 42 (2013): 511-62.
Hossain, B., and E. Latif, E. “Determinants of Housing Price Volatility in Canada: A Dynamic Analysis.†Applied Economics 41, no. 27 (2009): 3221-531.
How, C.Y., K.A. Janice, and V.P. Melina. “Islamic Financing and Bank Risks: The Case of Malaysia.†Thunderbird International Business Review 47, no.1 (2005): 75-94.
Hubbard, R.G., K.N. Kuttner, and D.N. Palia. “Are there Bank Effects in Borrowers’ Cost of Funds? Evidence from a Matched Sample of Borrowers and Banks.†The Journal of Business 75, no. 4 (2002): 559-81.
Ibrahim, Mansor, H. and Sufian, Fadzlan. “A Structural VAR Analysis of Islamic Financing in Malaysia.†A Studies in Economics and Finance, 2014, Vol. 31, Issue 4, 371-386.
International Organization for Standardization. Risk Management-Principles and Guidelines on Implementation. Geneva, Switzerland, 2008.
Islamic Financial Services Act (IFSA) 2013 (Act 759) and Orders. Selangor, Malaysia: International Law Book Services, 2013.
Kahf, M. “Basel II: Implications for Islamic Banking.†Paper presented at the 6th International Conference on Islamic Economics and Banking, Jakarta, Indonesia, 2005.
Kassim, S.H., S.M. Majid, and R.M. Yusof. “Impact of Monetary Policy Shocks on the Conventional and Islamic Banks in a Dual Banking System: Evidence from Malaysia.†Journal of Economic Cooperation and Development 30, no.1 (2009): 41-58.
Kathneman, D., and A. Tversky. “Prospect Theory: An Analysis of Decisions under Risk.†Econometrica 47, no. 2 (1979): 263-72.
Khan T. and Ahmed H. “Risk Management: An Analysis of Issues in Islamic Financial Industry.†IRTI Occasional Paper no.5 (2001).
Lahsasna, A. Q and A in Islamic Finance. Kuala Lumpur, Malaysia: CERT Publications, 2010.
Leung, C.K.Y., Y.C.F. Leong and S.K. Wong. “Housing Price Dispersion: An Empirical Investigation.†Journal of Real Estate Finance and Economics 32, no.3 (2006): 357-95.
Liebeg, D., and M.S. Schwaiger, M.S. “Determinants of Interest Rate Margin of Austrian Banks.†Financial Stability Report (2008): 104-16.
Liow, K.H., H. Zhu, D.K. Ho, and K. Dapaah-Addae. “Regime Changes in International Securitized Property Markets.†Journal of Real Estate Portfolio Management 11, no. 2 (2005): 147-65.
Li, M. “Factors Influencing Household Demand for Life Insurance.†MBA thesis, University of Missouri-Columbia, USA, 2008.
Louis, Henock, and A.X. Sun. “Long Term Growth in Housing Prices and Stock Returns.†Real Estate Economics 42, no. 3 (2013): 663-708.
Luo, Z., C. Liu, and D. Picken. “Granger Causality Among House Price and Macroeconomic Variables in Victoria.†Pacific Rim Property Research Journal 13, no. 2 (2007): 234-56.
Louziz, D., A. Vouldis, and V. Metaxas. “Macroeconomic and Bank-Specific Determinants of Nonperforming Loans in Greece: A Comparative Study of Mortgage, Business and Consumer Loan Portfolios.†Journal of Banking and Finance 36, no.4 (2012): 1012-27.
Khan, T., and H. Ahmed. “Risk Management: An Analysis of Issues in Islamic Financial Industry.†Occasional Paper no. 5, Islamic Research and Training Institute, Islamic Development Bank, 2001.
Mahfudz, A.A., N.H. Ahmad, R. Mohd. Yusof, A. Mohd. Naim, and A. Turkhan. “Restructuring Rental Rate Components to be more Innovative Sharia Compliance Product in Islamic Home Financing.†European Journal of Islamic Finance 1, no. 5 (2016): 1-6.
Merna, T., and F. Al-Thani. Corporate Risk Management. United Kingdom: John Wiley and Sons, 2009.
Miller, N., and L. Peng. “Exploring Metropolitan House Price Volatility.†Journal of Real Estate Finance and Economics 33, no. 1 (2006): 5-18.
Mirakhor, A. “Epistemology of Finance: Mitigating Risk.†Islamic Finance Review 2, no. 2 (2012): 7-10.
Mohd. Yusof, R. “Rental Rate as An Alternative Pricing for Islamic Home Financing: An Empirical Investigation on the UK Market.†International Journal of Housing Market and Analysis (forthcoming in 2016).
Obaidullah, M. Islamic Financial Services. Jeddah: Islamic Economics Research Centre, King Abdulaziz University, 2005.
Orhan, E., A. Coskun, and H. Oruc. “A Survey-Based Analysis of the Housing Market in an Emerging Economy: The Turkish Case.†Emerging Markets Finance and Trade 49, supplement 5 (2013): 59-79.
Pew Research Center. Muslim Americans: Middle Class and Mostly Mainstream. Washington, USA: Population Reference Bureau, 2007.
Ramli, R., M.N. Ismail, and A.Z.M. Shaarani. Issues in Islamic Finance from the Practitioners’ Perspective. Kuala Lumpur, Malaysia: IBFIM, 2013.
Schroeck, G. Risk Management and Value Creation in Financial Institutions. New Jersey, USA: John Wiley, 2002.
Schwab, R.M. “Real and Nominal Interest Rates and the Demand for Housing.†Journal of Urban Economics 13, no.2 (1983) 181-95.
Siddiqui, A. (2008). “Financial Contracts, Risk and Performance of Islamic Banking.†Managerial Finance 34, no. 10 (2008): 680-94.
Stevenson, S. “A Long Term Analysis of Housing and Inflation.†Journal of Housing Economics 9, nos.1/2 (2000): 24-39.
Stubbs, D. “Australia’s Housing Boom Ends – Is a Crash Around the Corner?†Australian Property Journal 38, no.7 (2005): 523-9.
Sundararajan, V. “Risk Measurement and Disclosure in Islamic Finance and the Implications of Profit Sharing Investment Accounts.†Proceedings of the 6th International Conference on Islamic Economics and Finance. Jakarta, Indonesia (2005): 23-4.
Tsatsaronis, K., and H. Zhu. “What Drives Housing Price Dynamics: Cross-Country Evidence.†BIS Quarterly Review (2004): 65-78.
Tu, Y. “Segmentation of Australian Housing Markets: 1989-98.†Journal of Property Research 17, no. 4 (2000): 311-27.
Van Order, R., and A. Dougherty, A. “Housing Demand and Real Interest Rates.†Journal of Urban Economics 29, no. 2 (1991): 191-201.
Von Greuning, H., and Z. Iqbal. Risk Analysis for Islamic Banks. Washinton D.C.: The World Bank, 2008.
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Published
2016-11-29
How to Cite
Abdul Rahman, Z., Ahmad, N. H., Mohamed Naim, A., & Bahaman, M. A. (2016). CRITIQUE ON RISKS IN ISLAMIC HOME FINANCING. International Journal of Economics, Management and Accounting, 24(2), 227–259. https://doi.org/10.31436/ijema.v24i2.383
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