+1 862 207 3288 156 ‘ Islamic Banking and Finance
a It follows that the ZDBM is more efficient; it absorbs fewer resources-funding deposits
are smaller. For the same reason, the model must also increase the liquidity levels in the
system.
o Research shows that a constant amortization programme, as in the ZDBM, is more equitable
than any other scheme in operation. In our illustration, half-way down the time scale, 50%
ownership passes to the customer as compared to 40% under the CM; see Table 2, column
10. This feature makes ZDBM more equitable to parties in default cases also.
Finally, the uniformity of instalment payments in the models in use is claimed as their
greatest advantage. Customers do not have to readjust their budget every time because the
upfront payment is the same. This payment not only remains uniform but is lower than in
ZDBM at the start. Thus it is easier for the young people to enter the housing market even
when they are on the lower rungs of the income ladder. Even if one accepts this advantage for
a moment, can meeting the Islamic imperatives be sacrificed for the gain? When one would
like to buy a house does not always or entirely depend on age, and the fact that two-income
households are becoming increasingly common takes much air out of this life-cycle theory.
Also, higher initial payments would curb the instinct to go for bigger houses than one can
afford. It was this instinct which contributed to the sub-prime crisis in the USA and put the
globe on a seemingly unending road to crisis.
It is as well to state that periodic payments-R of C + R on C-in the ZDBM are not
uniform though; they regularly fall by a constant amount. Again, admittedly, the payments
are on the higher side to start with, but they become increasingly lower half-way through.
Figure 6.3 vividly demonstrates these two facts. It cannot be determined beforehand which
side of the fence has the greater advantage; it is the individual customer’s circumstances
that matter.
Case study questions
1. The exponential growth involved in the Excel formula suggests that compounding of
return on capital is involved. Do you agree? Give reasons for your answer. f
2. What should be the measure of degree of ownership transfer in home financing-total 5
payment or capital return only and why? Explain. ,j
3. What will you prefer-lower, or higher periodic installment in the beginning in a home
financing contract with an Islamic bank, the total amount payable and time frame being 5’
the same? Give reasons for your choices.
case study 5,2 The agency problem and the unpopularity of mudarabah
with Islamic banks
Some writers blame mainly the agency problems for the banks’ reluctance to use mudarabah
as a financing mode. One need not deny the existence of the problem but to highlight it as
the focal point overriding others to account for mudarabah unpopularity with the banks
looks rather overstretched. Presumably, the changing attitudes, structures and environs that
characterize socio-economic dynamism in recent times have greater explanatory significance.
Agency problems refer to self-seeking on the part of individuals or their groups at the
expense of others in a chain of organizational relationships forged for promoting collective
benefits and sharing the same equitably. Agency problems, big or small, are scattered
throughout the hierarchic structure of modern corporations and their nexus with the socio-
political influence centres is no longer a secret. The literature is awash with illustrations of
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