An Interest Free Economic Model
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Transcript of An Interest Free Economic Model
An Interest Free Economic Model
Competitive and Perfect Markets Characteristics of Islamic Markets An Exchange and Two Sector Economy Intertemporal Behavior : Consumption,
Savings and Investment Capital Cost and Return Financial and Fiscal Policies The Implications of the Model
Perfect Competitive MarketO Free Entrance or ExitO Goods are HomogeneousO Market Information Is AccessibleO No Resource FixityO Prices Are Efficient
Complete Market Comprehensive Private and Public Property Rights Transferable Property Rights Exclusive Property Rights Secured Property Rights There Are Markets for Every Form and Condition
of Exchange First and Second Rules of Welfare Economics
Characteristics of Islamic Markets
1. Comprehensive property rights & value system
a. Multiple forms of private & public ownership & utilization rights
b. Ownership right is trust ship
2. Freedom of contract choice within Islamic value system
a. No Reba b. No Gharar غرر c. No worthless value creation
بالباطل المال اكل d. No harmful externality
ضرار ال و ضرر ال
Definition of Reba & Its Implication
• Loan of money or exchange of a commodity or debt for an extra value or service
• An alternative to sale, leasing, & joint venture contracts
• Formation of the loan market in the economy & legitimacy of earning interest income
• Prohibition of Reba is equivalent to elimination of loan market from the economy & illegitimacy of obtaining interest income
Definition of Gharar (غرر )& Its Implication
• Full specification of the quantity & quality of the commodity & its value or price in sales contracts
• No fraud or unrevealed defection in the product sold
• No misuse of information• Market transactions are transparent &
secure
No Worthless Activity ( اكلبالباطل (المال
• Supply of consumer & producer goods in the commodity market renders utility & value added, respectively
• Worthless products & services: Alcoholic drinks, gambling, debt based
assets & derivatives, pornography, bribery, cheating, unproductive intermediation (speculation), hoarding price fixing collusions ,(كنز)
No Harmful Activity( ضرر الضرار ال (و
• All consumption & production activities with negative externality are prohibited
• Pollution cost is internalized in the production cost of the firm
• Private & social costs tend to become equal
Characteristics of Islamic Financial Markets & Contracts• Both real & financial assets markets may
be formed; the latter fully represents the former
• Enforcement of Islamic contract rules renders a secure, transparent & competitive market environment
• Firms offer both fixed & variable rate of return products
• Risk averter consumers will purchase FRR assets : differed payments, installment sales, & hire purchase
• Risk lovers purchase VRR assets: profit loss sharing, Modaraba, Mosharaka
• Repeated transactions among consumers & producers will bring the asset market into the equilibrium
Envision An Exchange Economy with one type of Intertemporal Contract
Differed Payment; Baia moajal, or Nesia
A Perfect Competitive & Complete MarketAssume Price Efficiency
Intertemporal Commodity or Financial Asset Market
Assume
Justly
Distributed
Endowments
Among
Consumers
Excess Supply AgentsExcess Demand AgentsEquilibrium Spot Price PEquilibrium Future Price P’Equilibrium Market Rate of Return
P’/P = 1+ n Nesiah rate =n=(P’-P)/P
Consumption & Savings Over Time
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Saving Consumer
Demanding Consumer
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The Effect of Increase in n upon Consumption and Savings Decision
Goods or Assets Goods or
Assets
n Nesia rate
n Nesia rate
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Goods or Assets
n Nesia rate
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An Islamic Investment Model
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The Investment Function
Investment and Savings Functions
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Policy Implementation
Financial Policy
• Stimulating
• Contractionary
Fiscal policy
• Stimulating
• Contractionary
Implications of Eliminating Reba for the
Economy
Elimination of Loan Market
Extension and Deepening of Financial Markets
Implications of Eliminating the Loan Market
Nominal & Real Income are Proportionate
Cost of Capital is Determined Endogenously
Rapid Adjustment to External Shocks
Market Stability Achieved Saving Incentives Are
Maintained