Murabaha loans - Gulf News
If you elect to make a car loan to someone under Murabaha, the borrower receives title to car right away, and there is no interest. Problem: What incentive does the borrower have to repay the loan on the agreed schedule? Or ever?
From the economist's point of view, the problem is not merely a question of income redistribution (i.e., that the defaulting borrower has enriched himself by the same amount as the lender has lost). The economist's concern would be whether Murabaha has efficiency consequences: does it reduce the amount of borrowing that would take place.
People trade when it makes both better off. But without default penalties such trading opportunities may be squandered. Economists look to see whether society is making the most of its limited resources.
If you elect to make a car loan to someone under Murabaha, the borrower receives title to car right away, and there is no interest. Problem: What incentive does the borrower have to repay the loan on the agreed schedule? Or ever?
From the economist's point of view, the problem is not merely a question of income redistribution (i.e., that the defaulting borrower has enriched himself by the same amount as the lender has lost). The economist's concern would be whether Murabaha has efficiency consequences: does it reduce the amount of borrowing that would take place.
People trade when it makes both better off. But without default penalties such trading opportunities may be squandered. Economists look to see whether society is making the most of its limited resources.
posted by John B. Chilton at 3/17/2005 07:18:00 AM
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