Islamic Financing vs the Capital Asset Pricing Model (CAPM)

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The research article discusses two approaches, one method is Islamic financing and other is the conventional capital asset pricing model (CAPM). Using the direct Musharakah, Islamic financing method is applied against the conventional financing method by comparing each other. Comparing the two approaches has drawn several findings; it is found that the beta-risk is lower on investments, which are based on the partnership of Islamic financing as compared to the conventional market. The risk is on the share of the lenders and others but not on the risk-return. Equilibrium exists between the relative risk and the share of lender, furthermore, it is also discussed in the article that Islamic financing is not based on the fixed and predetermined rate of interest, prediction of inflation in future and the partnerships, which are based on the minimum risk with maximum return. Islamic financing is spreading with the growth rate of 23% annually and many Islamic financing banks and institutions are working all over the world.
The primary objective of this article is to lay down the hypothetical framework, which discusses the Profit and loss sharing based on Islamic principles with the investment of interest free partnership. According to the author, Islamic financing is based on the risk that is beard by the both parties. On the time of investment, whether agents have shortage or surplus of resources, they have to share the returns and risk on the investment they are making. General concepts of Islamic financing instruments like Mudarabah, Musharakah, Murabahah, Al-Salam and Al-Ijara are based on the mechanism of profit and loss sharing (PLS). All of these above mentioned partnerships are based on the agreed upon the subsequent loss or th...

... middle of paper ...

...anagement of the stock portfolios, implementing an Islamic CAPM would ultimately result in more satisfying results that can potentially produce generous income for the investor.

Works Cited

Hanif, M. and U. Bhatti, 2010. Validity of CAPM: Evidence from KSE. European Journal of Economics,
Finance & Administrative Sciences, Issue 20, pages 148-161.
Selim, T. H. (2008). An Islamic capital asset pricing model. Humanomics, 24(2), 122-129.
Hanif, Muhammad and Dar, Abubakar Javaid, Comparative Testing of Capital Asset Pricing Model (CAPM) and Shari’a Compliant Asset Pricing Model (SCAPM): Evidence from Karachi Stock Exchange - Pakistan (November 18, 2011). 4th South Asian International conference (SAICON-2012), Pearl Contenental Hotel, Bhurban, Pakistan, 05-07 December, 2012. Available at SSRN: http://ssrn.com/abstract=1961660 or http://dx.doi.org/10.2139/ssrn.1961660

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