Prepayment rebate in Islamic microfinance cost-plus sale: a descending rebate proposed approach

Abstract

Purpose This paper aims to propose an Islamic compliant approach that deals with the prepayment rebate on debts resulting from cost-plus sales and their accompanied sale-based financing contracts. The proposed approach uses the time value of money concept without charging excessive fees from the debtor in the early settlement of debts. Design/methodology/approach The paper uses a qualitative analysis via analyzing and reviewing relevant literature. A quantitative analysis is subsequently used with a proposed computation that addresses prepayment rebate accompanied by debts resulting from cost-plus sales. Findings The proposed approach results in a rebate amount for the debtor greater than those rebate amounts resulting from either conventional finance techniques or current Islamic finance practices. Research limitations/implications The application of the descending rebate proposed computation in this paper is restricted to cost-plus sale and their accompanied sale-based financing contracts only. The computation does not address any agreement or deal that may involve a rebate without a selling transaction. Originality/value The paper criticizes the prevailing practices for computing rebates in the case of debt prepayment, whether those nominated by conventional finance or others currently employed by most Islamic financial institutions. The paper also introduces a new rebate computation aimed to comply with Islamic finance's real context.