ISLAMIC BENCHMARKING: AN ALTERNATIVE TO INTEREST RATE (Evidence from Home Financing in Malaysia) by Ali Rama, Wisnu Wardhana, Farid Kurnia Rahman, Ilham Reza Ferdian
Islamic Benchmarking. An Alternative to Interest Rate
(Evidence from Home Financing in Malaysia)
By: Ali Rama, Wisnu Wardhana, Farid Kurnia Rahman, Ilham Reza Ferdian
Abstract
Applying interest rate is not only prohibited under shariah rule, but also made a world crisis.
Similar to conventional, Islamic banking nowadays uses the same component to determine
cost of capital in home financing. Islamic scholars then come out with rental rate as
replacement of interest rate. This paper attempts to discuss the possibility of using rental rate
as the basis in Musharakah Mutanaqisah Partnership (MMP) calculation. Furthermore, this
study does comparison between interest rate mortgage and Islamic Musharakah Mutanaqisah
and proves that rental rate is better than interest rate in terms of home financing. The result
shows that rental rate is lower than interest rate and will vary for each type and location of the
house. This study also finds that rental rate tends to be higher in urban areas or close to urban
areas. The result of correlation analysis shows that rental rate has positive weak correlation to
interest rate. Another interesting fact that emerged from this study is the rental rate tends to
be more stable when compared to the interest rate, even in condition of financial crisis in
1997/1998. However, single story in Kuala Lumpur has negative correlation and
condominium in Kuala Lumpur has strong correlation to interest rate. Thus we believe that
rental rate can be used as an alternative to interest rate for home financing because it reflects
the market value of the house and beneficial to society. This paper hopefully is useful for the
progress of Islamic banking in the world in terms of implementation of rental rate as a
financial product innovation and also an alternative to interest rate.
Keyword: Interest rate, rental rate, musharakah mutanaqisah.