The
Benchmark Issue in the Islamic Financial System
By
Zamir Iqbal
An
information officer at the World Bank in Washington, DC
08/06/2002
This
paper identifies a major lacuna in the conceptual development of
Islamic financial market operations. It argues that in the absence
of a well developed benchmark that would facilitate macro- and
micro-level decision making with regards to cost of capital and
opportunity cost of investments in comparative projects of similar
risk, Islamic financial institutions are relying on interest
rate-based indices such as the London Inter-Bank Offer Rate (LIBOR)
to make lending decisions. The author contends that this is clearly
unacceptable since Islam disallows a predetermined or fixed rate of
capital. The paper then proposes a benchmark based on Tobin's q
theory of investment. The author further maintains that unlike
existing alternatives which are limited to macro-level applications
only, the q-based benchmark would be useful for firms and banks
(micro-decisions) as well as governments and institutions
(macro-planning).
