swaprent scheme is in pdf attachements at bottom of page
Ralph Liu <peoplesally@gmail.com>
Dear FARJHO Ally,
We have just launched a crowdfunding project for the 501c3 non-profit PeoplesAlly Foundation on Indiegogo.http://igg.me/at/PeoplesAlly/x/2666771
The foundation was set up to assist low income working families and other regular Americans to use alternative method to own homes without the burden of incurring debt. It also aims to help current renters to own a piece of the American pie by becoming a partial owner of their own or other home properties in order to benefit from the housing market recovery.
On the way down, many ex-middle class Americans have lost their homes and become homeless or propertyless. Unless we could work together to develop a way to help them get back in the game to own at least a piece of the home equity on the way up again, the current investors' buying binge of single family homes will create a polarized society by letting America simply slide into a renter nation.
In this aspect, FARJHO offers a timely help to curb the furthering of wealth distribution inequality in our country since home equity is usually most low income working American families' main wealth builder, not through the ups and downs of a 401k because many do not even own one.
The participating home property co-owning retail high net worth investors, crowdfunding investors, institutional investors such as pension funds, endowments, hedge funds and private equity firms will all get to benefit from the potential price appreciation together in each FARJHO structure on a fair and equitable basis. Since there is no vacancy and no property management expenses (the home occupier is a co-owner), the rest of the co-investors would get a lot higher yield than they could when they own 100% of the home property and rent it out in the conventional way.
Upon many inquiries about the new FARJHO home equity sharing services, we have recently created a short video that explains how FARJHO works. It may be helpful for people who are new to the equity sharing concept to understand what the FARJHO method is all about. http://www.youtube.com/watch?v=UV0hUjAGUZg
We are very fortunate to have the attention and the interests of some major non-profit foundations so far. Please kindly help support our cause by making a small tax deductible contribution, sharing it with your colleagues, friends and encouraging them to support the good cause as well. Your organization's support would also be highly appreciated. Thanks for your help.
Comments on swaprent by salman hyder;
I hope this e-mail finds you in the best of health. I got to know about your proposal through Dr. Asad Zaman. It was a very good concept indeed. But, following are my observations.
1. In Islamic finance, the ownership at any particular time should be certain and known.
2. The payoffs from the ownership in the form of rent and land value appreciation only rest with the owner or owners (as per their proportional share in ownership).
3. The reason why consumer is not burdened with sharing land value appreciation with the financier is that banks get 3 times more than the value they give to the customer in a 15 year mortgage in Pakistan and in other countries where interest rates are high.
4. Since Islamic Banking is still just a fraction of conventional banking in al countries, Islamic banks try to equalize their payoffs even if they are using a different product structure which makes them Shariah Compliant.
5. Therefore, unfortunately, to convince Islamic banks to adopt a particular thing, one needs to convince conventional banks first and that is comparativerly easier than addressing Islamic banks solely.
Secondly, following is my critique of Diminishing Musharakah which I presented in my book "Proposal for a New Economic Framework Based on Islamic Principles". This will help you in answering similar concerns (if applicable) about your product.
"In ‘Diminishing Musharakah’, two contracts i.e. tenancy and sale are included as two separate components of a Diminishing Musharakah contract. Both these contracts are separated by way of a unilateral undertaking in place of the actual simultaneous sale/purchase of units of the asset/property. The rent is calculated and charged on the basis of KIBOR. The rent increases when the KIBOR increases.
Upon close inquiry, one can notice that undertaking or promise makes the contract conditional. This argument is further substantiated by the fact that if the client refuses to undertake or promise to buy the asset (in units), the bank will not make contract with him. Furthermore, the promise gives the legal cover to the bank and is acceptable in a court of law.
Following table compares the conventional mortgage and ‘Diminishing Musharakah'.
It can be seen from the table above that there is hardly any difference between the two modes of financing with respect to the flow of funds. (p. 148-149)
Thirdly, I would like to share my own proposal which is Ijara with Embedded Options which solves the problem of contingency of contracts.
"The bank buys the asset/property paying the asset owner the full amount of the asset. The Bank is now the owner of the asset. It gives the asset/property on rent to the financee and at the same time, the bank enters into an option contract as the call option writer. In a European option contract (exercisable only at expiration date), the financee buys that call option which gives him the right to buy the asset at call expiration. He has the right but not the obligation to buy. The option writer however, is obliged to sell the asset if the call buyer decides to exercise the contract. For short term options contracts as in corporate financing, American style call options contracts (exercisable on or before expiration date) can also be used.
If the call buyer does not exercise, the option contract expires and the bank is in a position to give the asset/property on rent again. If the call buyer exercises the contract, the bank gets the asset price plus the rental income for the period before the expiration of the contract.
The rent would be benchmarked using House Rent Index. This index could be established. The issue arises whether a fixed premium could be added or not. A fixed premium would ensure that even if the property for any reason reaches a value equal or close to zero, there is some rent charged greater than or equal to the fixed premium. However, since the contract itself does not have any connection with interest or interest rate benchmark and the rent is charged as long as the asset is in usable condition, it does not contradict with any of the Islamic principles. Here, one may point a contradiction that indexation on monetary loans is discouraged by Muslim scholars.
Responding to this argument, it must be emphasized that this contract is basically a tenancy contract and not a loan contract. Here, indexation is used, but it is a tenancy contract and not merely an extension of money loan. Indexation only in money loan is to be avoided.
In tenancy, rent accrues as long as contract remains in force and the asset remains in useful existence. In entrepreneurial ventures, profit accrues neither with time nor with any other factor. It results independent of time and its magnitude, positive or negative is not a function of a particular event or time. That is why; it must only be benchmarked with an index measuring profit alone in the underlying sectors/instruments without adding any fixed spread." (p. 132-133)
Finally, I would like to share my work on valuation in Islamic finance.
Pricing of Capital in Corporate Finance
In corporate finance, NGDP growth rate will be used in following valuation models:
1. It will replace RF in CAPM model.
2. It will help in calculating Ks and Capitalization rate in dividend discount model.
3. Income Bonds will be valued using DCF approach. The proposed benchmark rate i.e. NGDP growth rate would be used as the discount rate.
4. FCF could be calculated using this benchmark rate.
5. In project valuation, this benchmark rate would be used to find PV of Cash Flows. This would be appropriate due to following:
i. It will not lead us into falling in time value of money as we are using an enterprise or output related benchmark rather than interest based benchmark.
ii. The Cash Flows are obtained using equity contractual modes like Mudarabah and Musharakah.
iii. We are calculating valuation models for the investor and not for the borrower. Borrower or financee will be in no obligation to provide the returns based on these valuations. But, the investor can use this “indicative valuation results” to rank investment alternatives.
iv. In actual distribution of income between financier and financee, profit sharing ratio would be used and applied to the gross profit earned by the financee." (p.127-128)
Thanks for your time. Feel free to contact for any clarification, comments and fedback.
Salman Ahmed Shaikh
Project Director, Islamic Economics Project
Visiting Faculty, Szabist, Biztek, HIAST, UoE
Research Analyst, BMC Pakistan
External Reviewer, Bankers Academy, USA
www.islamiceconomics.viviti.com
Pricing of Capital in Public Finance
Data for the period 1970-2008 for a group of big economies i.e. America, Britain, Canada, China, the euro area, India and Japan on the variables Nominal Interest Rates (t) and Nominal GDP Growth Rate (t-1) shows that both variables virtually moved together throughout the period and especially since 1990. Nominal GDP growth rate can be used for indexing loans from the rest of the world and initially by Islamic Development Bank for its financing assets.
IMF provides lending to member countries for dealing with balance of payments crisis and maintain stability in the economy in the form of Stand-By Arrangements (SBA), Flexible Credit Line (FCL), Emergency Assistance (EA), Exogenous Shocks Facility (ESF) and Poverty Reduction and Growth Facility (PRGF) etc. These loans are usually pegged with IMF’s reserve currency i.e. SDR which is composed of a basket of currencies namely USD, JPY, GBP and Euro or pegged with USD or with any other hard currency, alternatively, the financing facility so provided can be benchmarked using nominal GDP growth rate of the lender’s country of origin or benchmarked with weighted Nominal GDP growth rate in major donor countries.
Financing in development projects from World Bank and International Development Association (IDA) can also be benchmarked with weighted Nominal GDP growth rate in major donor countries or countries whose currency is included in the basket of currencies which make up SDR. This will be an alternative for market based financing. For soft loans, aid and grants, the Nominal GDP growth rate in the recipient country can be used. It will not only compensate the financier for parting with liquidity and capital, but also provide a stable mechanism for recipient countries to get out of debt trap with debt servicing linked with output performance benchmark. Having this relief in the balance of payment and foreign debt, countries will be well set to introduce the proposed benchmark for pricing treasury bonds. Financing from domestic commercial banks can be benchmarked with the national nominal GDP growth rate.