Participating Mortgages: An Alternative to Housing Finance

Abstract

Since the 2007–2008 financial crisis, the markets related to housing finance have been restoring their tools and instruments in order to avoid a new crisis. In this period, while attempting to eliminate structural problems in existing housing finance instruments, on the other hand new products were tried to figure out. In particular, products based on risk sharing have frequently come to the forefront, both in the academia and the industry. In this direction, one such innovative product is the participating mortgage, in which the borrower obtains below-market interest rates in return for a percentage of the property’s future appreciation and/or net operating income. Particularly used in conventional markets, participating mortgage can also be applied within the Islamic finance thanks to the model it is based on. This chapter attempts to introduce the method of participating mortgage with detailed background and intellectual investigation. Including the modeling of participating mortgage, this study also shows how this method can be designed under Islamic finance. Furthermore, implications and fields of application are explored with a discussion of challenges. In this chapter, considering the achievements of participating mortgage method, it is asserted that it can enable the product diversity of the Islamic banks, thereby increasing the share in the global banking sector.

Citation

Varli, Y. (2018), "Participating Mortgages: An Alternative to Housing Finance", Hassan, M.K. and Rashid, M. (Ed.) Management of Islamic Finance: Principle, Practice, and Performance (International Finance Review, Vol. 19), Emerald Publishing Limited, Leeds, pp. 189-206. https://doi.org/10.1108/S1569-376720180000019010