MurabahaandMusharakah Moutanaquissahpricing: an interest-free approach

Abstract

PurposeThis study aims to provide an interest-free valuation methodology forMurabahaandMusharakah Moutanaquissahcontracts. Indeed, In Islamic finance, Murabaha contracts are widely negotiated. Their yield depends mainly on the contracted profit margin. In the current practices, this latter is based on a reference interest rate, which is highly criticized in Islamic literature, just likeMusharakah Moutanaquissahcontracts. In this perspective, authors suggest a new valuation methodology with parameters related to the real economy.Design/methodology/approachThe authors apply an indirect method to determine a lower bound of the profit margin of aMurabahacontract. ConsideringMusharakah Moutanaquissahas an equivalent contract, the new valuation methodology is based on participation and focuses on parameters from the real economy: the market rent and the rate of return used for an equivalent project.FindingsThe results show that the pricing ofMusharakah Moutanaquissahcontracts could be based on several parameters linked to the real economy. Consequently, an implied value of the profit margin could be computed. Also, the interest rate is no longer implicated in the pricing of neitherMurabahanorMusharakah Moutanaquissahcontracts.Research limitations/implicationsThe valuation methodology is applicable only if the underlying asset’s financing can be made withMurabahaandMusharakah Moutanaquissahcontracts.Practical implicationsThis work will restore the link between Islamic contracts and the real economy. For Islamic banks in particular, the suggested model would reduce the exposure to reputational risk and enhance the compliance to theSharia(Islamic Law).Originality/valueSeveral studies have analyzed the dependence between Islamic contracts and interest rates. In general, these studies confirm this dependence and few of them have suggested alternatives. Thus, the authors contribute to the literature by providing a practical and applicable model to detach the valuation ofMurabahaandMusharakah Moutanaquissahfrom the interest rate.