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A Stochastic Approach for Determining Profit Rate of Islamic Financing Products

Author

Listed:
  • Zaidi Isa

    (School of Mathematical Sciences, Faculty Science and Technology, Universiti Kebangsaan Malaysia 43600 Bangi, Selangor, Malaysia)

  • Nur Amalina Shafie

    (School of Mathematical Sciences, Faculty Science and Technology, Universiti Kebangsaan Malaysia 43600 Bangi, Selangor, Malaysia)

Abstract

Islamic Bank in Malaysia uses Bai' Bithaman Ajil method and Musharakah Mutanaqisah Partnership method for the home financing process. However, these house price calculation methods are still similar to conventional computation. In addition, profit rate in the Islamic bank still refer interest rate as benchmark. The objective in this study is to determine a profit benchmark by using stochastic forecasting. Base financing rate data from the year 1999 until 2014 is used in this study to forecast a profit for home financing and to find an optimum price. The exponential brownian motion model with drift is one of the stochastic forecasting models which has been identified as the best model to forecast the data in this study. After that, the probability of profit is compared to choose the best profit. The median of a profit distribution is proposed as a benchmark for determining the house price. This propose benchmark is fair to both bank and customer in terms of profit and installment, respectively

Suggested Citation

  • Zaidi Isa & Nur Amalina Shafie, 2017. "A Stochastic Approach for Determining Profit Rate of Islamic Financing Products," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 154-163.
    • Handle: RePEc:eco:journ1:2017-01-22
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    References listed on IDEAS

    as
    1. E. H. Ergeç & B. G. Arslan, 2013. "Impact of interest rates on Islamic and conventional banks: the case of Turkey," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2381-2388, June.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Forecasting; Risk; Analysis;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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