The rate of capitalisation in valuation models in an islamic economy
The main objective of this paper is to develop a quantitative methodology for determining the capitalization rate and to define its structure in Islamic valuation models. It has been shown that this all important parameter is the sum of two components: (I) the required rate of return, and (2) the risk premium. The required rate of return shown to be essentially the marginal efficiency of real investment, private or social, as the case may be. This rate was determined by the Islamic social choice, model, whereby the investor is faced not with the problem of allocating his income among consumption intertemporally, but rather with the problem of allocating his income into real investment intertemporally. On the question of risk-premium it was shown that the returns in an Islamic investment are inextricably a putty-clay of the pure economic and pure non-economic returns. In the light of such a return it was shown that an Islamic entrepreneur need not be strictly risk averse with regard to pure economic return. However, with respect to the total Islamic return, the usual analytical assumptions of risk- aversion may be used. Finally, the paper has been focussed on the real economy. However, the issues and applications of the rate-of-return analysis are to be found in project evaluation problems of both the real and money economies. According to the author, the main results of this paper will hinge on the following two assumptions: i) Intertemporally, savings will be weighted more towards the production of capital goods rather than to consumption goods. ii) The total return from an Islamic investment or what we also refer to in this paper as an Islamic return is the sum of a pure economic component and a pure ‘non-economic’ component.
A Social Service Model in the I-Economy
Proceedings of the Seventh Annual Conference