The Benchmark Issue in the Islamic Financial System
This paper identifies a major lacuna in the conceptual development of Islamic financial market operations. It argues that in the absence of a well developed benchmark that would facilitate macro- and micro-level decision making with regards to cost of capital and opportunity cost of investments in...
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| Format: | article |
| Language: | EN |
| Published: |
International Institute of Islamic Thought
1999
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| Subjects: | |
| Online Access: | https://doaj.org/article/20e5bfe08f6444b8b9ddc2f6c9b3faca |
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| Summary: | This paper identifies a major lacuna in the conceptual development of
Islamic financial market operations. It argues that in the absence of a
well developed benchmark that would facilitate macro- and micro-level
decision making with regards to cost of capital and opportunity cost of
investments in comparative projects of similar risk, Islamic financial
institutions are relying on interest rate-based indices such as the London
Inter-Bank Offer Rate (LIBOR) to make lending decisions. The author
contends that this is clearly unacceptable since Islam disallows a predetermined
or fixed rate of capital. The paper then proposes a benchmark
based on Tobin’s q theory of investment. The author further maintains
that unlike existing alternatives which are limited to macro-level
applications only, the q-based benchmark would be useful for firms and
banks (micro-decisions) as well as governments and institutions
(macro-planning).
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