COST OF CAPITAL AND INVESTMENT IN A NON-INTEREST ECONOMY

It has been contended that Islamic banks and financial institutions continue to use the interest rate mechanism as a benchmark for procurement and placement of funds because in the absence of an interest rate mechanism there is no benchmark against which the cost of capital can be measured and the efficiency of investment projects evaluated. This paper proposes a method by which the cost of capital can be measured without resort to a fixed and predetermined interest rate. The suggested procedure is simple and is based on the well-known Tobin’s q and can be used in the private as well as in the public sector to obtain benchmark in reference to which investment decisions can be made.