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Cost Of Capital And Investment In A Non-Interest Economy

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  • MIRAKHOR, ABBAS

    (Executive Director, International Monetary Fund)

Abstract

It has been contended that Islamic banks and financial institutions continue to use the interest rate mechanism as a benchmark for procurement and placement of funds because in the absence of an interest rate mechanism there is no benchmark against which the cost of capital can be measured and the efficiency of investment projects evaluated. This paper proposes a method by which the cost of capital can be measured without resort to a fixed and predetermined interest rate. The suggested procedure is simple and is based on the well-known Tobin’s q and can be used in the private as well as in the public sector to obtain benchmark in reference to which investment decisions can be made.

Suggested Citation

  • Mirakhor, Abbas, 1996. "Cost Of Capital And Investment In A Non-Interest Economy," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 4, pages 35-47.
    • Handle: RePEc:ris:isecst:0100
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    References listed on IDEAS

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    1. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
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    Cited by:

    1. Renee van Eyden & Goodness C. Aye & Rangan Gupta, 2012. "Predictive Ability of Competing Models for South Africa’s Fixed Business Non- Residential Investment Spending," Working Papers 201229, University of Pretoria, Department of Economics.
    2. Uddin, Md Akther & Halim, Asyraf, 2015. "Islamic monetary policy: Is there an alternative of interest rate?," MPRA Paper 67697, University Library of Munich, Germany, revised 07 Jun 2015.
    3. Shaikh, Salman, 2012. "Interest Based Financial Intermediation: Analysis and Solutions," MPRA Paper 42500, University Library of Munich, Germany.
    4. Ul Haque, Nadeem & Mirakhor, Abbas, 1999. "The Design Of Instruments For Government Finance In An Islamic Economy," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 6, pages 27-43.
    5. Jardine A. Husman & Ali Sakti & Dahnila Dahlan & Imam Wahyudi Indrawan & Zaäfri A. Husodo & Nur Dhani Hendranastiti & Muhammad Budi Prasetyo & Wahyu Jatmiko, 2022. "On The Development Of The Islamic Benchmark Rate: An Indonesian Case," Working Papers WP/04/2022, Bank Indonesia.
    6. Haque, Nadeem ul & Mirakhor, Abbas, 1999. "The Design of Instruments For Government Finance in An Islamic Economy," MPRA Paper 56028, University Library of Munich, Germany.
    7. Onour, Ibrahim, 2011. "الخيارات وإدارة المخاطر فى أسواق السلع: دعوة لرؤية جديدة [Options as Islamic Financial Derivative: Thoughts provoking discussion]," MPRA Paper 30707, University Library of Munich, Germany.

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