On the design and efficiency of a participating growth bill.

Ebrahim, Muhammed-Shahid; Bashir, Abdel-Hameed M.

Abstract

A Participating Growth Bill (PGB) is an innovative hybrid financial vehicle employed by Western institutions and governments in lieu of short-term debt instruments. This study proposes PGB to be considered as an alternative way of raising funds for open market operations by the governments of Muslim countries constrained by religious regulations against fixed-interest debt (ribawi) financing. The security (PGB) is developed using partial equilibrium analysis under the assumption that the assets backing the financial package do not trade in a secondary market—a situation which invalidates the risk-neutral pricing of the well-known Black and Scholes (1973) model. The study finally demonstrates the efficiency of a PGB over a conventional (ribawi) debt vehicle thereby providing results contrary to assertions of the (i) Capital Structure Irrelevance Theorem (see Modigliani and Miller, 1958) and (ii) Capital Asset Pricing Model (CAPM) (see Sharpe, 1964).

Citation

Ebrahim, M., & Bashir, A. M. (1999). On the design and efficiency of a participating growth bill. The Quarterly Review of Economics and Finance, 39(4), 513-527. https://doi.org/10.1016/s1062-9769%2899%2900036-8

• Journal Article Type: Article
• Publication Date: 1999
• Deposit Date: Sep 25, 2014
• Journal: Quarterly Review of Economics and Finance
• Print ISSN: 1062-9769
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 39
• Issue: 4
• Pages: 513-527
• DOI: https://doi.org/10.1016/s1062-9769%2899%2900036-8
• Public URL: https://durham-repository.worktribe.com/output/1420604