There are two distinctly different views on the pricing of Islamic Financial transactions. Some argue it should be more expensive than conventional finance, whereas others argue the exact opposite. As usual, the answer will lie somewhere in the middle.
Arguments in favour of higher pricing are often voiced by the banks offering the products. Their reasoning usually revolves around additional work that needs to be done to structure the transaction, cost associated with the Sharia’a Supervisory Board (SSB), and higher legal fees. All very valid reasons, but is there really that much extra work? Does the SSB really have to cost that much? Personally, I would say no to both. Legal fees are a different issue, but they can usually be negotiated back to normal levels.
On the other hand there are the arguments that it should be cheaper. Main reason cited for this is usually that there is no interest. Often swiftly followed by the reason that it’s not very compliant to charge more. Neither of those is particularly relevant either. Indeed, there is a prohibition on interest but that does not mean there is no cost of capital. The focus on social responsibility and the slightly more risk averse nature is similar to that of, for example, credit unions, and building societies.
Sharia’a compliant transactions, just like conventional finance, should be priced in the context of their economic reality. This means considering risk, cost of capital, and potential future growth. Hence, as long as the business is run efficiently that means they should neither be cheaper nor more expensive.
Dr Natalie Schoon, CFA
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