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Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?

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Ebrahim, M. Shahid

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Abstract 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 pareto-superior to formal mortgages in special cases.
Keywords inflation
Classification Political Economy
Free Keywords C63 (Computational Techniques); G21 (Banks – Mortgages); G32 (Financing Policy – Capital and Ownership Structures); I31 (Welfare and Poverty); O17 (Formal and Informal Sectors; Institutional Arrangements); P13 (Cooperative Enterprises); ASCRA; Asset Bubble; Mutual Bank; Mortgage Design; ROSCA
Document language English
Publication Year 2009
Page/Pages 864–883 p.
Journal Journal of Economic Behavior & Organization, 72 (2009) 3
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)