Economic Pricing Mechanisms for Islamic Financial Instruments: Ijarah Model

The Islamic Economic and banking industry have been trying for the last two decades to extend its outreach to expand its operation business and services in a comparable footing to conventional banking. This paper discusses one of the important hurdles in the growth of Islamic banking which is the use of KIBOR as benchmark for pricing the Islamic banking products. Muskun home financing product of BankIslami Pakistan Limited is used in this paper to elaborate the pricing and benchmarking of product, spread between the conventional interest rate and Islamic profit rate as well as the alternative product pricing mechanism to be used by Islamic banks for this product. Details of Muskun home financing product are discussed in this paper in addition to the marketing strategy, market approach, economic product development, and all other relevant processes.