Abstract

It is well established that countries require investments in infrastructure, education, healthcare and institutional development for long term growth in income levels. However, due to the positive externalities associated with these sectors and issues such as non-excludability and non-rivalry, participation from private sector in these areas is generally inadequate and it becomes necessary for the state to intervene for optimal capital allocation. Generally, the quantum of funds required for nationwide developmental programs exceeds the resources that states can generate through one-time taxation and shortfalls are usually sourced from debt markets. Sovereign borrowing has recently attracted attention given the deteriorating credit quality of some nations resulting from heightened borrowing during the financial crisis. From an Islamic perspective, interest based borrowing is classified as a transaction based on riba, and therefore forbidden, by an overwhelming majority of scholars. This paper attempts to understand developmental activities pursued by governments and to explore alternative approaches to finance such activities without resorting to interest bearing instruments. Such alternatives include public-private partnerships, tax incentives, developing Corporate Social Responsibility (CSR) programs, auctioning scarce resources, and sovereign divestments.

Full Text
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