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Risk and return of mudarabas: Empirical evidence from Pakistan
Author(s) -
Uppal Jamshed Y.
Publication year - 1999
Publication title -
thunderbird international business review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.553
H-Index - 37
eISSN - 1520-6874
pISSN - 1096-4762
DOI - 10.1002/tie.4270410415
Subject(s) - debt , equity (law) , business , risk–return spectrum , return on equity , finance , empirical evidence , economics , financial system , profitability index , portfolio , philosophy , epistemology , political science , law
As a response to the Islamic prohibition on debt financing, innovative financial institutions (mudarabas or modarabas) offer alternative financing instruments based on profit and loss sharing contracts. The article analyzes the theoretical risk and return characteristics of such instruments. An empirical exercise examines the risk and return profiles of mudaraba certificates in Pakistan and compares these with those of equity and debt securities. The analysis shows that mudaraba certificates have characteristics which would classify them as equity securities rather than debt securities. One implication of our results is that the cost of capital would be higher for firms which are forced to substitute debt with mudaraba financing. © 1999 John Wiley & Sons, Inc.