Islamic finance in Europe (167)

Continuation

Borrowers may also base their:

-      borrowing

-      and default

decisions on a rational comparison of the costs.

That costs associated with the respective financing contracts.

When choosing a financing, they also take into account the expected cost of default.

Banks can charge penalties to a borrower defaulting on an Islamic financing.

But, unlike with a conventional loan, they have to give that same amount to charity.

Because banks (like borrowers) base their financing decisions on a rational comparison of the associated:

-      costs

-      and benefits.

From the research paper of European Central Bank

(Authors: F.Mauro, P.Caristi, S.Couderc, A.D.Maria, L.Ho, B.K.Grewal, S.Masciantonio, S. Ongena and S.Zaher)