RENTAL YIELD AS AN ALTERNATIVE TO INTEREST RATE IN PRICING MUSYARAKAH MUTANAQISAH HOME FINANCING – THE CASE FOR MALAYSIA

Abstract

The current practice of the Islamic banks in Malaysia is relying on
the market interest rate as the reference benchmark pricing for
musyarakah mutanaqisah home financing. It has been a subject of
intense debate among scholars, researchers, industry players, and
policymakers. While it is not prohibited, Muslim scholars have highly
discouraged this practice as it could lead to a possible convergence
between the practices of the Islamic banks and the conventional
counterparts. Therefore, this study proposes rental yield an
alternative reference benchmark pricing mechanism for musyarakah
mutanaqisah home financing. The aim of the study is to assess
whether rental yield is reflective of the real economic conditions. In
achieving its objective, the study tests the relationships between
rental yield with the macroeconomic and housing market variables.
The study focuses on Malaysia and uses annually data frequency
covering the period from 1988 to 2015 using Autoregressive
Distributed Lag (ARDL) cointegration test. The study provides
evidence that the proposed rental yield has long-run and short-run
relationships with macroeconomic and housing market variables.
The analysis shows that a short period required for the model to
converge to the long-run equilibrium. The findings of this study
would provide important insights on the viability of rental yield as an
alternative to interest rate in pricing musyarakah mutanaqisah home
financing.