Public Finance and Islamic Capital Markets: Theory and Application (Palgrave Studies in Islamic Banking, Finance, and Economics)

This book addresses the financing of government budgets with non-debt-creating flows through risk-sharing capital market instruments. It offers a comparative analysis with conventional finance to demonstrate the ability of Islamic capital market instruments to create an impetus for economic stability and growth. Rizvi, Bacha, and Mirakhor guide readers chronologically through the unfolding effects of macroeconomic policy implemented to reduce crippling sovereign debt, increase government financing, and guide governments to the path of economic progress. Dedication 6 Preface 8 Contents 10 List of Figures 12 List of Tables 14 Chapter 1: Conventional Macroeconomic Policy 15 Macroeconomic Objectives 16 Stabilization and Growth 16 Inflation 17 Does Inflation Impair Growth? 18 External Balance 19 Macroeconomic Policies 20 Fiscal Policy 21 Sources of Fiscal Revenues and Policy Constraints 21 Borrowing Constraints 21 Aid Delivery and Absorption 22 Public Resource Mobilization 23 The Effectiveness of Fiscal Policy 24 The Procyclical Bias of Fiscal Policy 26 Alternative Fiscal Policy Measures 27 Management of Public–Private Partnerships 27 Automatic Stabilizers: Fiscal Stabilization Funds 28 Countercyclical Tax Policies, Low-Cost Stimuli and Other Fiscal Policy Alternatives 28 Monetary Policy 29 Monetary Policy Instruments 29 Quantitative Instruments 29 Qualitative Instruments 30 The Effectiveness of Monetary Policy 31 Exchange Rate Policy 32 Impact of Devaluation 33 Impact on Aggregate Demand and Growth 33 References 34 Chapter 2: Islamic Macroeconomic Policies 36 Social and Economic Justice 37 Equality of Opportunity 38 Justice in Exchange (Economic Transactions) 38 Distributive Justice 39 Prohibition of Interest (Riba) 40 Risk Sharing System 41 Goals of Macroeconomic Policy in Islam 42 Macroeconomic Equilibrium: Characteristics of an Islamic Economy 43 Open Economy Model 44 Conclusion 55 References 56 Chapter 3: Capital Markets: Conventional Versus Islamic 57 What and Why of Capital Markets 58 Capital Markets—Conventional versus Islamic 61 Bond Markets 61 The Islamic Alternative—Sukuk and its Markets 63 The Equity Markets 64 Islamic Equity Markets 66 Derivatives Markets 68 Islamic Derivatives 70 Forex Markets 72 Current Trends in Capital Markets 74 Reference 75 Chapter 4: Risk Sharing and Public Policy 76 Risk 78 Why Does it Even Exist? 78 Types of Risk 80 Risk in the Real Sector and in the Financial Sector 80 Risk, Uncertainty and Ambiguity 82 Risk Sharing 84 Government Policy and Risk Sharing 89 Islamic Finance and Risk Sharing: The Role of Public Policy 94 Conclusions 101 References 103 Chapter 5: Government Finance and the Debt Market 110 Why Debt Matters 111 The Short-Run Impact 112 The Long Run: Reduced National Saving and its Consequences 112 Other Effects 114 Types of Government Debt 115 Productive and Unproductive Debts 116 Voluntary and Compulsory Debt 116 Internal Versus External 116 Debt Dynamics of the Current World 117 Pitfalls of Government Debt 121 Conclusion 125 References 126 Chapter 6: Government Finance and the Equity Market 127 Advantages and Disadvantages of Stock Markets 128 Stock Markets and Risk Sharing 132 Conditions for a Vibrant, Robust Stock Market 135 References 139 Chapter 7: Macro Market Application 141 Indexed Bonds 142 Benefits of GDP-Linked Bonds 145 Macro Risk Sharing Islamic Finance Instruments 146 Pay-off Structure 151 Is the Instrument Viable? 154 Viability for Investors 154 Value for Issuers 157 Graphical Presentation of Simulated GDP 159 Summary and Remarks 161 Notes 163 References 164 Chapter 8: Micro Market Application 166 Why Risk Transfer at Micro-Level? 167 Potential Instruments 169 Funding Revenue Generating Projects 169 Funding Non-Revenue Generating Projects 171 Government Infrastructure Sukuk 173 RSF Instruments for Government Development Financing 173 Evaluating Proposed Instruments 177 Summary and Concluding Remarks 180 Notes 180 References 180 Chapter 9: Markets and the Way Forward 182 Interventions in Capital Markets 183 Price and Quantity Based Controls on Inflows and Outflows 183 Soft Controls: Encouraging Market Segmentation 184 Public Sector Liability Management in Developing Countries 184 Capital Markets and Islamic Finance 185 Macro- and Micromarket Instruments 187 Conclusion and Final Thoughts 189 References 191 Index 192 "Dedication"--"Preface"--"Contents" -- "List of Figures" -- "List of Tables" -- "Chapter 1: Conventional Macroeconomic Policy" -- "Macroeconomic Objectives" -- "Stabilization and Growth" -- "Inflation" -- "Does Inflation Impair Growth?" -- "External Balance" -- "Macroeconomic Policies" -- "Fiscal Policy" -- "Sources of Fiscal Revenues and Policy Constraints" -- " Borrowing Constraints" -- " Aid Delivery and Absorption" -- "Public Resource Mobilization" -- "The Effectiveness of Fiscal Policy" -- "The Procyclical Bias of Fiscal Policy" -- "Alternative Fiscal Policy Measures" -- "Management of Publicâ#x80;#x93;Private Partnerships" -- "Automatic Stabilizers: Fiscal Stabilization Funds" -- "Countercyclical Tax Policies, Low-Cost Stimuli and Other Fiscal Policy Alternatives" -- "Monetary Policy" -- "Monetary Policy Instruments" -- " Quantitative Instruments" -- " Qualitative Instruments" -- "The Effectiveness of Monetary Policy" -- "Exchange Rate Policy" -- "Impact of Devaluation" -- " Impact on Aggregate Demand and Growth" -- "References" -- "Chapter 2: Islamic Macroeconomic Policies" -- "Social and Economic Justice" -- "Equality of Opportunity" -- "Justice in Exchange (Economic Transactions)" -- "Distributive Justice" -- "Prohibition of Interest (Riba)" -- "Risk Sharing System" -- "Goals of Macroeconomic Policy in Islam" -- "Macroeconomic Equilibrium: Characteristics of an Islamic Economy" -- "Open Economy Model" -- "Conclusion" -- "References" -- "Chapter 3: Capital Markets: Conventional Versus Islamic" -- "What and Why of Capital Markets" -- "Capital Marketsâ#x80;#x94;Conventional versus Islamic" -- "Bond Markets" -- "The Islamic Alternativeâ#x80;#x94;Sukuk and its Markets" -- "The Equity Markets" -- "Islamic Equity Markets" -- "Derivatives Markets" -- "Islamic Derivatives" -- "Forex Markets" -- "Current Trends in Capital Markets." Annotation This volume addresses the financing of government budgets with non-debt-creating flows through risk-sharing capital market instruments. It offers a comparative analysis with conventional finance to demonstrate the ability of Islamic capital market instruments to create an impetus for economic stability and growth. Rizvi, Bacha, and Mirakhor guide readers chronologically through the unfolding effects of macroeconomic policy implemented to reduce crippling sovereign debt, increase government financing, and guide governments to the path of economic progress Front Matter....Pages i-xiii Conventional Macroeconomic Policy....Pages 1-21 Islamic Macroeconomic Policies....Pages 23-43 Capital Markets: Conventional Versus Islamic....Pages 45-63 Risk Sharing and Public Policy....Pages 65-98 Government Finance and the Debt Market....Pages 99-115 Government Finance and the Equity Market....Pages 117-130 Macro Market Application....Pages 131-155 Micro Market Application....Pages 157-172 Markets and the Way Forward....Pages 173-182 Back Matter....Pages 183-185