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Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?
[journal article]
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 integ... view more
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.... view less
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
DOI
https://doi.org/10.1016/j.jebo.2009.08.002
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)