This part shows the calculation for both instruments, the Bai Bithaman Ajil and the Musharakah Mutanaqisah, and the annuity formula will be used for each periodic payment for both instruments. The results will be presented according to the comparative purpose:
i) Annual Profit Rate (APR) could be charged by financer to their client;
ii) Periodic payments should be paid by client to the financer;
iii) Total payments should be paid by client to the financer at the end of the financing (for BBA) or leasing (for MM) period.
Measurement factors for both instruments are determined based on the same example and stated as shown below:
Type of asset = A house
Asset price = RM 150,000
Client’s down payment = RM 15,000(10% from asset price)
Duration of financing = 15 years
i) Additional information for BBA:
Annual Profit Rate = 14%
ii) Additional information for MM:
Rental payment = RM 1,000
APR or Rate of Return (IRR) = 0.67%
Bai Bithaman Ajil Calculation
a) Annual Instalments=RM 21,979.21
b) Monthly Instalments=RM 1,831.60
c) Total Payment
= Down Payments + (Monthly Instalment x 15 years)
= RM 15,000 + (RM 1,831.60 x 12 months x15 years)
= RM 344,688.15
Musharakah Mutanaqisah Calculation
a) Monthly Rental=RM 1,000
b) Monthly Redemption= RM 288.25
The same process of calculation is implemented until the end of the 15 years (180 months). The complete figure is attached in the Appendix. However, the annuity formula can be implemented as well to determine the total payment per month for the customer:
M = RM 1,293.25
As a result, the annual payment is RM 15,519 (RM 1,293.25 x 12 months) and the total payment for 15 years is RM 232,785 (RM 15,519 x 15 years). The amount RM 900 is different because different formulae will give different monthly payments. In the first calculation, monthly instalment is only RM 1,288.25 compared with the monthly installment using the annuity formula which is RM 1,293.25.
Comparisons between BBA and MM
Table 2 provides a comparison for financing the home using the BBA and MM methods; and it is clear that the total interest or bank’s profit in the BBA method is higher than in the MM method. However, the monthly payment is lower in the MM (RM1,288.25) compared with BBA (RM 1,831.60). Based on MM calculation framework, the return to MM is solely determined by the rental rate as a percentage of the house price. The rental rate in this case is 0.67% per month, and the financer’s return is not determined by the initial capital provided by the financer or by the duration of the contract that is usual under debt financing.
Furthermore, total payment in MM method (RM 231,885) is higher compared to total payment in BBA method (RM 329,688.15), which shows that the MM contract does not burden the customer to repay the financer’s capital and it is a better instrument for the customer. Even though the profit rate for the bank is quite low, it still can cover their initial capital and the contract provides profits for the bank.
sources from: http://academic-papers.org/ocs2/session/Papers/C8/514-698-1-RV.doc
