A CRITIQUE OF THE DIMINISHING BALANCE METHOD OF ISLAMIC HOME FINANCING

This paper criticizes a new ‘Islamic’ home financing model proposed in Hasan (2011a), “Islamic Home Finance in the Social Mirror”, that appeared in ISRA International Journal of Islamic Finance, Vol. 3, Issue 1, pp. 7-24 and in another subsequent paper Hasan (2011b), “Riba in La-Riba Contracts: Where to Turn in Islamic Home Financing?”. These papers argued that the Diminishing Balance method, which the author affectionately calls the Zubair Diminishing Balance Method (ZDBM), is superior to the Islamic Mushārakah Mutanāqiṣah partnership (MMP) model, which the papers claim to be no better than its conventional ribā-based counterpart. The ZDBM is argued to be cheaper for the customer without being costlier to the bank. Also at any point in time, the debt on a default date is argued to be smaller in the ZDBM model. This paper discusses the fallacies in the arguments presented and shows that the ZDBM is similar to the conventional interest-based loan or, at best, similar to the murābaḥah-based bayʿ bi thaman ājil (BBA). Moreover, it is not cheaper, as claimed, but potentially more burdensome and increases the probability of default. Hence the ZDBM would face similar problems to those encountered in BBA financing, particularly when it comes to early settlement; the balance of financing can even be more than the original financing amount. The MMP model is indeed, therefore, superior to the ZDBM and is also Sharīʿah-compliant without much ado.