On The Development Of The Islamic Benchmark Rate: An Indonesian Case

Purpose — Central to the long-standing issue of Islamic finance is the lack of an established reference rate. This study proposes an alternative to the Islamic benchmark rate by linking it with the performance of underlying businesses. Design/methodology/approach — First, we derive the very definition of how a particular rate can be considered Islamic employing a thorough literature review. Second, this study then calculates the Cash Recovery Rate (CRR) and the Return on Invested Capital (ROIC) for each country listed on the Indonesia Stock Exchange. Third, we then analyse the statistical descriptive, correlation in terms of its value and graphical plot at both the univariate and multivariate levels. Findings — Our thorough literature review suggests that the classic CRR and the ROIC are theoretically consistent with the principles of pricing in Islamic finance. This is also empirically confirmed by employing the Indonesian data, where we observe a high correlation between CRR (ROIC) and short-term (long-term) economic macroeconomic indicators. Originality — To the best of our knowledge, this is the first study exploring the possibility of CRR and ROIC as Islamic benchmark pricing. Research limitations/implications — The spatial focus of this study is Indonesia. While the robustness check has incorporated the case of the US. Other countries may have different structures and institutions of the financial markets. Practical implications — The classic measures of firm performance CRR and ROIC prove useful to be alternatives to Islamic benchmarking both theoretically and empirically.