Journal of Islamic Business and Management
Risk Sharing and Public Finance
Azura Othman and Abbas Mirakhor
Published online: June 2014
Dominant macroeconomic policy regimes are anchored on the interest based debt finance that has created a divergence between the real sector and the financial sector of the economy. Uncertainty has been growing regarding the adequacy of current policy regimes to provide sustainable solutions to contemporary economic problems and challenges, including improvement in the quality of life in addition to the traditional objective of achieving growth with price stability. Policy tools that provide an incentive structure for closing the gap between financial and real sectors of the economy and at the same time enhance social solidarity through the mutual sharing of risks and return could provide more effective means of addressing these challenges. This concept paper offers an alternative policy regime that proposes first, a monetary policy that is targeted directly at asset market activities and private sector portfolio adjustments. Secondly, it suggests mobilization of funds for financing fiscal operations based on risk sharing through sale of government low-denomination equity participation papers directly to the public tradable in secondary markets. The latter proposal is supplemented with a reform of the tax structure. The benefits include better return to savers, improved financial inclusion through broadened public participation, improved governance and positive distributional implications for current and future generations. The objective of these policy reforms is to achieve stability and growth of the real economy, without losing sight of the goal of achieving justice and equity among members of the society.
Monetary and Fiscal Policy; Macroeconomic Management; Equity Participation Shares; Risk Sharing; Tax Structure.