Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?
This paper investigates a form of cooperative mortgage financing practiced in Oman. It integrates the literature of mortgage design with that of Rotating Savings and Credit Associations (ROSCAs) to illustrate that this mode of financing dissipates credit risk better than the formal mode of financing.
Cooperative mortgage financing is resilient to interest rate volatility, and allows prepayments without any additional charges. Study results indicate that in comparison to their formal counterparts:
- Cooperative home mortgages are more efficient as the loan amount is marginally higher;
- Cooperative home mortgage are less prone to defaults;
- Housing finance cooperatives perform better during periods of volatile interest rates;
- Overall efficiency of a cooperative is contingent on the underlying characteristics of a home, that of the borrower and its underwriting standards.
A cooperative serves as an exemplary special circuit that does not depend on government subsidies, and manages available resources more efficiently with reduced risk. The paper recommends that it be adopted globally to help the disadvantaged gain from its economic benefits.
