QUESTION 29

Assume that Ahmed obtains a 500,000 dirham non-reducing Islamic-type financial instrument (Murabaha) to get a car. The term of the arrangement is 4 years, with monthly payments, and the annual profit rate is 2%. (If this was a non-Islamic add-on loan, the add-on interest rate would be 2% annually.) Determine the total profit for the Islamic bank (it is the same as interest paid for an add-on loan) over 4 years and the monthly payments.

For extra, extra credit: determine the effective annual interest rate if this profit stream was for a conventional fixed-rate, amortizing loan.