Market Rent Value as a Basis for Profit Margin Calculation in Home Financings Based on Diminishing Musharakah with Ijarah: Possibilities for Implementation in Bosnia and Herzegovina

Abstract

Musharakah is one of the most used Islamic financing models because of the flexibility it provides for both banks and clients and transparency in terms of profit and loss sharing. Most Islamic banks calculate profit margin for diminishing musharakah financings using different external and internal criteria, such as risk premium, costs of sources, client’s rating, and competition margins. Profit margin is often linked to different referent indices, like LIBOR, as financings based on diminishing musharakah are usually long-term financings. Profit margin could also be calculated using a market rent as a base, since the revenue bank receives from a client is actually rent for its share in real estate bought through diminishing musharakah financing. In this paper, we shall analyze possibilities to use market rent as a base for profit margin in Bosna Bank International Sarajevo (BBI), the only bank in Bosnia and Herzegovina that operates according to Shariah principles.

Fikret Hadžić: Deceased.