By Salman Ahmed Shaikh
Abstract
This research aims to explore the issue of how to price capital, appraise projects and value securities in an Islamic economy. An Islamic economy does not allow interest based financial system. Financial intermediation in an Islamic economy will principally revolve around equity based modes of financing. Still, a problem arises in the valuation of cash flows that are spread over time. In this paper, we explore the possibility of using the nominal GDP growth rate as a benchmark rate for financial valuations. We discuss the issues in using the benchmark from both Islamic principles point of view and the economic and financial point of view. We present empirical evidence using different tools of descriptive statistics. Section 1 discusses the problems with pricing benchmark. Section 2 gives an extensive literature review on this topic. Section 3 presents the proposal. Finally, Section 4 gives a detailed analysis and application of the proposal.
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