Abstract
This paper identifies a major lacuna in the conceptual development ofIslamic financial market operations. It argues that in the absence of awell developed benchmark that would facilitate macro- and micro-leveldecision making with regards to cost of capital and opportunity cost ofinvestments in comparative projects of similar risk, Islamic financialinstitutions are relying on interest rate-based indices such as the LondonInter-Bank Offer Rate (LIBOR) to make lending decisions. The authorcontends that this is clearly unacceptable since Islam disallows a predeterminedor fixed rate of capital. The paper then proposes a benchmarkbased on Tobin’s q theory of investment. The author further maintainsthat unlike existing alternatives which are limited to macro-levelapplications only, the q-based benchmark would be useful for firms andbanks (micro-decisions) as well as governments and institutions(macro-planning).
Published Version
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