Considering the Annuity Formula: In Western countries a client who intend to buy a house apply for an annuity1 housing loan at their bank. After the pay-out of the debt amount the client pays a constant (annual) amount (interest and repayment of debt) to the bank for e.g. 25 years. The client is owner of the house and owes money to the bank, after 25 years (s)he is free of debt and still owns the house. Islamic law generally prohibits a charge of interest so that Islamic banks offer the following Islamic housing “loan contract” (called “Islamic loan”): 1. The house is bought by the bank in t = 0 so that she is owner of the house. 2. The client pays a periodic rent to the bank for a defined period of 25 years. 3. After 25 years the bank donates the house to the client (“for free”) if the rent was regularly paid (without any outstanding payments). Question 1: Please specify all possible parameters (i.e. variables) on an Islamic loan contract so that an Islamic bank can calculate the conditions of this contract. Question 2: Please briefly argue how you would “derive” the missing variable of the annuity formula for the Islamic loan. Question 3: Please duplicate the Islamic loan by “Western” financial instruments. Please note your view (either bank’s or house renter’s view).

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Considering the Annuity Formula:

In Western countries a client who intend to buy a house apply for an annuity1 housing loan at
their bank. After the pay-out of the debt amount the client pays a constant (annual) amount
(interest and repayment of debt) to the bank for e.g. 25 years. The client is owner of the
house and owes money to the bank, after 25 years (s)he is free of debt and still owns the
house.


Islamic law generally prohibits a charge of interest so that Islamic banks offer the following
Islamic housing “loan contract” (called “Islamic loan”):
1. The house is bought by the bank in t = 0 so that she is owner of the house.
2. The client pays a periodic rent to the bank for a defined period of 25 years.
3. After 25 years the bank donates the house to the client (“for free”) if the rent was
regularly paid (without any outstanding payments).


Question 1: Please specify all possible parameters (i.e. variables) on an Islamic loan contract so that
an Islamic bank can calculate the conditions of this contract.
Question 2: Please briefly argue how you would “derive” the missing variable of the annuity formula
for the Islamic loan.
Question 3: Please duplicate the Islamic loan by “Western” financial instruments.
Please note your view (either bank’s or house renter’s view).

Expert Solution
steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Factors Affecting Housing Decision
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education