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An Islamic capital asset pricing model


  • Tarek H. Selim


Purpose - The purpose of this paper is to describe the application of the Islamic financing method based on direct musharakah to the conventional capital asset pricing model yielding several interesting hypotheses. Design/methodology/approach - Theoretical methodology, with maximin criteria, and rational economic optimization. Findings - There are four major findings. First, an Islamic financing partnership based on complementary capital is proven to necessarily yield a lower beta-risk of investments than that compared to the market. Second, in order for the above conclusion to hold, capital lenders (such as banks) must abide by a maximum partnership share inversely proportional to project risk and increasing with opportunity cost of capital. Third, the sum of lender's share and relative risk level balances to unity at equilibrium. Hence, tradeoffs exist in risk-shares and not in risk-returns. Fourth, without accounting for inflation, and in contrast to predetermined fixed interest, a maximin strategy of financing partnerships (maximum return with minimum risk) imply an existence of an optimum zero risk-free rate. Research limitations/implications - The paper's findings are limited to a Direct Musharakah Partnership. Originality/value - A comparison between Islamic risks and returns to conventional risk management is deduced. Several implications on the conduct of Islamic financing are discussed.

Suggested Citation

  • Tarek H. Selim, 2008. "An Islamic capital asset pricing model," Humanomics: The International Journal of Systems and Ethics, Emerald Group Publishing, vol. 24(2), pages 122-129, May.
  • Handle: RePEc:eme:humpps:v:24:y:2008:i:2:p:122-129

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    References listed on IDEAS

    1. Lerner, Abba P, 1972. "The Economics and Politics of Consumer Sovereignty," American Economic Review, American Economic Association, vol. 62(2), pages 258-266, May.
    2. Timothy Taylor, 2008. "Recommendations for Further Reading," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 235-242, Spring.
    3. Timothy Taylor, 2008. "Recommendations for Further Reading," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 217-224, Fall.
    4. Timothy Taylor, 2008. "Recommendations for Further Reading," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 223-230, Summer.
    5. Timothy Taylor, 2008. "Recommendations for Further Reading," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 235-242, Winter.
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    Cited by:

    1. repec:pal:assmgt:v:18:y:2017:i:7:d:10.1057_s41260-017-0051-x is not listed on IDEAS
    2. Omran M. F., 2009. "Examining the Effects of Islamic Beliefs on the Valuation of Financial Institutions in the United Arab Emirates," Review of Middle East Economics and Finance, De Gruyter, vol. 5(1), pages 72-79, May.

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    Islam; Economics; Finance; Asset valuation; Partnership;


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