ON THE PRICING OF AN ISLAMIC CONVERTIBLE MORTGAGE FOR INFRASTRUCTURE PROJECT FINANCING

This paper models a default-free convertible facility to finance infrastructure projects in emerging Muslim countries. The mortgage is designed as a combination of an Islamic credit facility (allowing the collateralization of debt by the assets of the firm as espoused in Scott[32], Stulz and Johnson[36]) and inclusion of real warrants (as espoused in Green[12], Haugen and Senbet[15]) to mitigate the agency cost of debt discussed in Myers[27]. Numerical simulation is employed to endogenously solve for the rate of return, tenure and fractional ownership to be conveyed to financier upon conversion of the facility without resorting to any interest based (ribawi) index. Finally, sensitivity analysis is conducted to study the impact of exogenous variables and to reconcile with the existing mainstream finance literature such as Barclay and Smith[3], Stohs and Mauer [35] and Guedes and Opler [13].