Corporate Finance in an Interest Free Economy: An Alternate Approach to Practiced Islamic Corporate Finance
Journal of Islamic Banking & Finance, International Association of Islamic Banks
17 Pages Posted: 28 Dec 2009 Last revised: 17 Nov 2010
Date Written: December 22, 2009
This paper suggests an alternate approach to corporate finance in an interest free economy by looking beyond practiced Islamic finance and suggesting alternatives for corporate finance in sourcing funds i.e. i) Ijara with embedded options, ii) limited liability partnership, iii) equity modes like Musharakah and Mudarabah iv) income bonds and v) convertible income bonds. It also suggests alternatives for corporate finance in using funds i.e. i) Islamic income funds, ii) Islamic REITs, iii) Treasury Bonds, iv) income bonds v) convertible income bonds, vi) foreign currency reserves, vii) making strategic expansion, and viii) equity investments in other companies. It also suggests methods of valuation by suggesting an alternate means of pricing capital in interest free economy and use of appropriate discount rate i.e. Nominal GDP growth rate in public finance and corporate finance in CAPM, dividend discount model, project valuation, calculating NPV, valuing income bonds and stocks. It also discusses how the problems of scarcity of capital will be solved and alternatives for insurance in an interest free economy.
Keywords: Islamic corporate finance, pricing of capital, Islamic public finance, scarcity of capital, Interest free economy, Interest free finance, Zakat, Usury, Time value of money, CAPM, Project evaluation, NPV, FCF
JEL Classification: G21, G30, G38
Suggested Citation: Suggested Citation