Table Of ContentPALGRAVE STUDIES IN
ISLAMIC BANKING,
FINANCE, AND ECONOMICS
PUBLIC FINANCE
AND ISLAMIC
CAPITAL MARKETS
Theory and Application
Syed Aun R. Rizvi
Obiyathulla I. Bacha
Abbas Mirakhor
Palgrave Studies in Islamic Banking,
Finance, and Economics
Series Editors
Zamir Iqbal
World Bank, Potomac , USA
Jahangir Sultan
Bentley University
Boston , Massachusetts, USA
Mehmet Asutay
Durham University
School of Govt. & International Affairs
Durham , United Kingdom
The aim of this series is to explore the various disciplines and sub-
disciplines of Islamic banking, fi nance and economics through the lens of
theoretical, practical, and empirical research. Monographs and edited col-
lections in this series will focus on key developmentsin the Islamic fi nancial
industry as well as relevant contributions made tomoral economy, inno-
vations in instruments, regulatory and supervisory issues, risk manage-
ment, insurance, and asset management. The scope of these books willset
this series apart from the competition by offering in-depth critical analy-
ses of conceptual, institutional, operational, and instrumental aspects of
this emerging fi eld. This series is expected to attract focused theoretical
studies, in-depth surveys of current practices, trends, and standards, and
cutting-e dge empirical research.
More information about this series at
http://www.springer.com/series/14618
Syed Aun R . Rizvi • Obiyathulla I. Bacha • A bbas Mirakhor
Public Finance and
Islamic Capital
Markets
Theory and Application
Syed Aun R. Rizvi Abbas Mirakhor
Lahore University of International Centre for Education
Management Sciences, in Islamic Finance (INCEIF),
Lahore, Pakistan Kuala Lumpur, Malaysia
Obiyathulla I. Bacha
International Centre for Education
in Islamic Finance (INCEIF),
Kuala Lumpur, Malaysia
Palgrave Studies in Islamic Banking, Finance, and Economics
ISBN 978-1-137-55341-6 ISBN 978-1-137-55342-3 (eBook)
DOI 10.1057/978-1-137-55342-3
Library of Congress Control Number: 2016956400
© The Editor(s) (if applicable) and The Author(s) 2 016
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May Allah (swt) accept this effort as a modest contribution towards
knowledge in Islamic fi nance. May he bless our beloved departed parents
and guide our loved ones in this world
P
REFACE
Different economic ideologies have prevailed during the evolution of the
human species and many economic systems have come and gone. Each
system has brought with it an ideological paradigm, which has tended to
have limited applicability and lifespan. The market-based, capitalist system
prevalent in the most of the world may seem to be the most dominant and
resilient of all. But even this has received a number of shocks at its very
core. The fi nancial meltdown of 2007–2008, which resulted in a global
economic slowdown, has had an extensive fallout for the western world,
and has fueled the rise of China as a global economic powerhouse. The
currently ensuing European Union debt crises, which have already taken
Greece as their fi rst victim, and threaten Italy and others on the brink,
have challenged the fundamental belief in the invincibility of the capitalist-
based economic system.
The cause of the recent economic crises, as with the many localized
crises in individual countries over the past two decades, has been the
centuries-o ld “debt” problem. While debt per se has existed for millennia,
why has it never caused such disasters? The answer lies in the nature of the
debt. The modern-day fi nancial system has inbred uncertainty owing to
the nature of its debt which is founded in the ex ante determined interest
rates. While the goals of economic policies have been deliberated over for
decades and are relatively standardized now, into economic stability, low
infl ation, favorable external balances and so on, the effective policies to
achieve these policies have been elusive. A plausible reason has been exces-
sive leverage and debt burden thateconomies are facing due to imprudent
fi scal policies. The world is on the lookout for an alternative system or
vii
viii PREFACE
complimentary instruments which can give hope to the fl edging global
economy.
The rising interest in Islamic fi nance and banking over the last two
decades has revived the debate on the holistic framework of Islamic mac-
roeconomics. It has been long been argued that it is time for Islamic
economics to provide an alternative to the debt problems and the fi scal
management crisis through its justice-based economic ideological sys-
tem. The answer to the above problems could lie within this ideological
framework and in the risk sharing philosophy Islamic economic system
proposes. Risk sharing is not a unique concept—for example, the conven-
tional economist Robert Shiller argued over two decades ago for a concept
of collective and individual risk-sharing. His idea was based on the notion
that the globalization of economic systems would signifi cantly improve
international and domestic risk-sharing.
With the notion of risk sharing as the underlying possible solution to
the ongoing sustainability of sovereign crises, the role of markets and
especially capital markets comes into play. As capital markets play an effec-
tive role in resource allocation and they offer risk sharing opportunities in
the form of equity markets, their role is crucial.
There are two sets of risk sharing instrument which have been explored
in literature and industry, macromarket instruments and micromarket
instruments. While macromarket instruments are designed to promote
global risk sharing amongst different countries, and are designed as equity
in nature instruments, their popularity has been dismal. Based on the con-
cept of an ownership in the economy of the country, known as “TRILLs”
in the United States, the gross domestic product (GDP)-indexed macro-
market instruments offer governments a solution to their debt burden. The
same can be replicated through Islamic fi nance and fi nancial instruments in
domestic micromarkets to ease the burden of ex ante interest rate fi nancing
for governments which have for long been the boon for policy makers.
Risk sharing and Islamic economic philosophy more generally have
long provided ideas for different nations to prosper and innovate. Some
of those ideas have survived in venture capital fi nancing, and with the pas-
sage of time, risk sharing instruments for fi rms and for governments to
target domestic markets have been replaced by risk shifting instruments.
This book offers some preliminary proposals, and some empirical works
on risk sharing instruments within the context of macro- and micromar-
kets which can be used both by governments to bridge the fi scal fi nances
for public expenditure.
C
ONTENTS
1 Conventional Macroeconomic Policy 1
2 Islamic Macroeconomic Policies 2 3
3 Capital Markets: Conventional Versus Islamic 4 5
4 Risk Sharing and Public Policy 6 5
5 Government Finance and the Debt Market 99
6 Government Finance and the Equity Market 1 17
7 Macro Market Application 1 31
8 Micro Market Application 157
9 Markets and the Way Forward 173
Index 1 83
ix
