“Mesbah Point is the vertex point of a parabolic curve resulted from calculating the discounted values of the total amount of interest during the amortization period at interest rate spectrum between 1% to 30%. The Mesbah Point value is the optimum initial amount of collected upfront payment from borrower, irrespective of the interest rate in the market, that allows the establishment of a new zero percent interest, no interest lending Mesbah finance platform. Based on this method, the borrower pays the amount of Mesbah Point upfront in order to receive a zero percent, no interest loan. The borrower only makes monthly principal payments during the term of the loan”
Establishing an Interest-Free Lending Platform Applying Optimum Premium, “Mesbah Point”, in Amortization and Time Value of Money
Amir Behnam Izadyar, Feroza Ragnath
(IJBSR), Volume -4, No.-1, January, 2014, pp 1-18
The concept of “Interest” has been viewed as a forbidden instrument in Islamic investments. This study has focused on establishing an interest-free platform, and introducing a new method of direct-to-consumer financing using the amortization and the time value of money. Based on this method, the borrower makes a pre-determined amount of upfront payment in order to receive zero percent interest rate financing and only makes monthly principal payments during the term of the loan. Using the same interest rate and the same term period as in amortization, the total amount of interest occurring during the amortized loan is replaced as future value and the discounted value is calculated as the amount of upfront payment. The relationship between the amount of upfront payment in each range of 30,20,15,10 and 5 year terms and the interest rates 1%-30% shows a parabolic pattern in each term, in which the amount of upfront payment will increase to a pivotal level in each term and will decrease as the interest rate increases. The vertex point of the parabola is named “Mesbah Point” in order to distinguish this conceptual point. Therefore, Mesbah Point is the optimum amount of upfront payment collected, irrespective of the interest rate, to receive an interest free, zero percent loan. In other words, Mesbah Point is as an interest rate-proof value in which the borrower, regardless of interest rates in the market, can contribute a pre-determined amount of upfront payment to receive an interest free, zero percent interest rate loan. A New Perspective of Benevolent Loan, Using Upfront Payment “Mesbah Point”
Amir Behnam Izadyar, Feroza Ragnath
(IJE), Volume -1, No.-3, May, 2014, pp 45-58 http://journalofeconomics.org/index.php/site/article/view/72/33
Bound by religious or moral beliefs of the participants, benevolent loan, Qard al-hasan, is an interest free loan in which only the return of the capital is required during the term of the loan. Lack of institutional investor participation, as well as high administrative fees, are some of the major obstacles that have kept Qard al-hasan from gaining popularity in financial lending. This study has demonstrated a new method in Qard al-hasan lending using Mesbah Point to promote Qard al-hasan as a viable lending transaction. Based on this method the borrower initially makes an optimum amount of upfront payment to receive a zero percent interest rate, no fee loan. The distribution of remaining principal has been studied under two scenarios; Standard MP and Accelerated MP. Based on Mesbah Finance platform the Qard al-hasan lenders and the financial institutions can gain sufficient returns which may help them to cope with their accruing costs as well as earn some profit by providing Qard al-hasan. Although the rate of return in this method unsurprisingly remains below the conventional method, accelerating the monthly payments to the level of conventional monthly payments significantly improves these shortfalls and offsets the gap of return. Accelerated MP shortens the payback period especially in longer loan terms as well as increases the earnings to the level that the participation of institutional investors are possible. The institutionalization of Qard al-hasan is the ultimate aspiration in the Islamic banking system and this study meets the most challenging Islamic lending practice which is Qard al-hasan.