Islamic Mortgages: Lessons for the West? Uzair Azmat and Kenneth Kasa

17 Pages Posted: 21 Feb 2023

See all articles by Kenneth Kasa

Kenneth Kasa

Simon Fraser University (SFU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

This paper compares default rates on Islamic and Western mortgages. Islamic mortgages feature a ‘partnership’ arrangement between the bank and the borrower, which allows the borrower to recover the current market value of his accumulated equity upon default. By itself, this makes default attractive relative to Western mortgages. However, we show that if agents care about realized gains and losses, as in models based on ‘Realization Utility’ (Barberis and Xiong (2012)), the equity recovery associated with Islamic mortgages creates a powerful disincentive to default. Using a standard real options framework, we use data from Indonesia, Malaysia, and Pakistan to show that our model can explain the relatively low default rates on Islamic mortgages.

Suggested Citation

Kasa, Kenneth, Islamic Mortgages: Lessons for the West? Uzair Azmat and Kenneth Kasa. Available at SSRN: https://ssrn.com/abstract=4366214 or http://dx.doi.org/10.2139/ssrn.4366214

Kenneth Kasa (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
327
Rank
546,794
PlumX Metrics