Abstract
Abstract This paper builds a theoretical framework of two-period general equilibrium model to explore whether 1) the restrictions of the Islamic financial system (RIFS) limit economic development in Xinjiang and 2) counterpart financial support for Xinjiang (CFSX) promotes economic development and social stability. First, we introduce above mentioned restrictions caused by Islamic beliefs into a general equilibrium model and modify Islamic agents’ budget constraints to define the benchmark equilibrium. Comparing the benchmark equilibrium with the perfect equilibrium, in which these restrictions are removed, we discover the RIFS paradox that RIFS undermine the social welfare and income of Muslims. Second, the financial support is introduced into the pattern of benchmark equilibrium as an exogenous variable to model its impact and hence we define the CFSX equilibrium. A series of policy analyses implies that the CFSX strategy improves living standards and social welfare in Xinjiang.
Highlights
Interest is the compensatory expenses paid by the debtor to the creditor
External economic support is needed to weaken or even eliminate the negative effects of the borrowing constraints imposed by religious beliefs, so that Muslims can enjoy the same level of income and social welfare as non-Muslims without such constraints
We use general economic equilibrium theory to study the restrictions of the Islamic financial system (RIFS) that constrain Xinjiang’s economic development and the CFSX that promotes stable development in Xinjiang — Using a two-period general equilibrium model[7,8] to simulate the prohibition of interest under Islam and impact of the CFSX on the life and welfare of Muslims in China
Summary
Interest is the compensatory expenses paid by the debtor to the creditor. On the one hand, interest is the price of borrowing money for debtors; on the other hand, interest can partially decrease the credit risk and opportunity cost of debt investments for investors who provide loads or buy bonds. In 2016, the proportion of Muslims in Xinjiang has reached 59.77% This setting provides us with a unique window to study the constriant to Xinjiang’s Islamic economic development from the perspective of the restrictions of the Islamic financial system (RIFS). We use general economic equilibrium theory to study the RIFS that constrain Xinjiang’s economic development and the CFSX that promotes stable development in Xinjiang — Using a two-period (the simplest dynamic) general equilibrium model[7,8] to simulate the prohibition of interest under Islam and impact of the CFSX on the life and welfare of Muslims in China. We assume that both Muslims and non-Muslims face the same interest rate and can borrow through financial intermediaries The equilibrium of this situation is called perfect equilibrium.
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