Consumers' perception on Islamic home financing

Abstract Purpose – The purpose of this paper is to examine customers' perception on two modes of home financing namely Bai Bithaman Ajil (BBA), debt‐based financing, and diminishing partnership (DP), an equity‐based financing, focusing on the concepts used, methods of computation and pricing, Shariah compliant, justice and equality, societal well being and equitable distribution of wealth and income and preference for the products. Design/methodology/approach – The perception of respondents towards BBA and DP home financing were obtained by distributing a self‐administered survey questionnaire to a sample of 320 postgraduate students from three universities. Postgraduate students are considered suitable samples for this study because they are educated and own a house or intended to own one in the future. Findings – Customers are dissatisfied with the prevailing mode of BBA financing as the bank's profit is computed upfront resulting in high pricing, injustice and a burden to individuals and society. On the other hand, the DP home financing mode is more preferred as profit and risk is shared between the customer and bank resulting in greater fairness, justice and equity. Its features also meet the purpose of the Shariah (Maqasid al Shariah). Research limitations/implications – The use of convenience sampling and postgraduate students may not sufficiently capture the variations that could potentially exist in the market. Practical implications – There is a need for Islamic banks to move away from their dependence on debt mode of financing such as Murabahah and BBA to equity financing. The latter mode provides them with greater flexibility and innovation which can be used to fulfill customers' needs and wants. Originality/value – The paper provides empirical evidence on the viability of home ownership based on equity financing which reduces customers' debt over a long period. This is due to the flexibility of purchasing the bank's share to own the house earlier. The DP model can also be used for the purchase of equipment and vehicles. It can also be applied to joint ventures and private equity arrangements.