Abstract
PurposeThis paper aims to present the theoretical and conceptual framework of a new method in public finance called “participation based tax increment financing (P-TIF)” by combining conventional tax increment financing (TIF) within the Sharīʿah-compliance structure.Design/methodology/approachThis study develops a benchmark model for P-TIF, which offers a participative contract between both lender and borrower. With the help of this model, a financing schema in P-TIF is established by incorporating stochastic modelling. Possible implications and alternative options of application are also explored with a discussion of challenges.FindingsThe results mainly indicate that P-TIF promises lenders to be a part of increment from tax earnings, in return for a reduced interest rate. They show how a rise in participation of the lender in a given contract lowers the interest rate. Under the base case scenario, the interest rate is reduced to zero when the participation of the lender in tax increment is set at 50%.Practical implicationsWith the feature of being interest-free, P-TIF can be implied also within the Sharīʿah-compliance framework, thanks to the model it is based on. Additionally, as the model in this paper is parametric, it can be applicable to various cases in Islamic finance.Originality/valueTo the best of our knowledge, this is the first paper in the literature in the sense that it provides a conceptual idea and respective model for TIF method within a Sharīʿah-compliance framework.
Highlights
In the current world, after the start of the modern era, the transformations led by industrialization have had some significant effects on various phenomena in the economy
Concluding remarks tax increment financing (TIF) is a public finance instrument in which future tax revenues of the renovated district are sold or assigned to a third party in exchange for a cash payment to cover the cost of designation
Various modern implications of TIF practices have been widely observed in developed countries such as the USA and Canada, its different versions have been used as a traditional borrowing method by the Ottoman Empire and in many European countries as well
Summary
After the start of the modern era, the transformations led by industrialization have had some significant effects on various phenomena in the economy. TIF is one of public finance practices for economic development used by local governments and municipalities to finance new development and renovation projects in tax increment districts (TIDs). This study proposes participation-based tax increment financing (P-TIF) as a viable solution for local governments to cater for the needs of community development in both emerging and Muslim countries. Under the P-TIF financing method, a benchmark model is established with the benefit of stochastic modelling This model offers a participation-based contract between the lender and the borrower in a given TID. In relation to alternative financing methods for local development projects, Hummel and Goud (2017) investigated the esham-ijarah structure (a revenue-sharing arrangement based on the esham structure combined with ijarah sÁukūk), a type of Islamic borrowing product, in the USA.
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