Rental yield as the Reference benchmark pricing for Musyarakah Mutanaqisah home financing in Malaysia

Abstract

Islamic financial institutions offer home financing products which are fully compliant with Shariah. A problem lies in the fact that the musyarakah mutanaqisah home financing product lacks a reference, or price benchmark, which is independent on the interest rate. Many have suggested to price this product based on rental rate, as this rate is indicative of the real value of the property being occupied. The main objective of this study is to assess the viability of rental yield as a pricing reference for musyarakah mutanaqisah home financing, as an alternative to reliance on the market interest rate. This study adopts a multi-step research approach to arrive at conclusive findings. The first step is to determine whether the rental yield is reflective of real economic conditions, while the second is to examine the future trend for rental yield in four different states in Malaysia - Kuala Lumpur, Selangor, Johor, and Penang. In the third step, the forecast data are used to discern the details of musyarakah mutanaqisah home financing products, and, lastly, the resulting price between musyarakah mutanaqisah home financing based on rental yield is compared with murabahah and conventional home financing. This research utilizes the autoregressive distributed lag (ARDL) model to analyze the relationship between rental yield with selected macroeconomic and housing market variables for the 1988 to 2016 period using annual data. The forecasting technique of the auto regressive integrated moving average (ARIMA) and artificial neural network (ANN) models are adopted to assess the predictability of the rental yield for a period of 20 years. The study provides evidence that rental yield is found to be reflective when regressed against the macroeconomic and housing market indicators. The analysis shows that a short period is required for the model to adjust back to the long-term equilibrium. The result observes the future movements of the housing market by considering the rental yield. Based on a simulation exercise, the projected Islamic financial institution’s gain for musyarakah mutanaqisah home financing for Kuala Lumpur is RM278,143.76, which is the highest amount among four different states in Malaysia. While the projected Islamic financial institution’s gain for home financing in Penang is RM89,888.52, which is the lowest amount among the selected states. The difference in total payments made by a customer for musyarakah mutanaqisah home financing and murabahah/conventional housing loan amounts to RM36,640.02. The evidence in this research benefits to those stakeholders of Islamic financial institutions that want to refer to the rental yield as pricing benchmark for Islamic home financing. In conclusion, the rental yield is proposed as being a suitable alternative as the reference rate to benchmark price of Islamic home financing products, based on the musyarakah mutanaqisah model. Rental yield is regarded as a rate that is fair to both the customer and Islamic financial institutions, as it measures the actual rate of return to both parties in musyarakah mutanaqisah contract. The proposed rental yield is more stable, having less fluctuations and yet comparable to the conventional interest rates. The customers should gain more transparency as the rental yield measures the true usufruct of the property, as appose to the interest charges which are not tied to the property’s usufruct.