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On The Development Of The Islamic Benchmark Rate: An Indonesian Case

Author

Listed:
  • Jardine A. Husman

    (Bank Indonesia)

  • Ali Sakti

    (Bank Indonesia)

  • Dahnila Dahlan

    (Bank Indonesia)

  • Imam Wahyudi Indrawan

    (Bank Indonesia)

  • Zaäfri A. Husodo

    (University of Indonesia)

  • Nur Dhani Hendranastiti

    (University of Indonesia)

  • Muhammad Budi Prasetyo

    (University of Indonesia)

  • Wahyu Jatmiko

    (University of Indonesia)

Abstract
Purpose — Central to the long-standing issue of Islamic finance is the lack of an established reference rate. This study proposes an alternative to the Islamic benchmark rate by linking it with the performance of underlying businesses. Design/methodology/approach — First, we derive the very definition of how a particular rate can be considered Islamic employing a thorough literature review. Second, this study then calculates the Cash Recovery Rate (CRR) and the Return on Invested Capital (ROIC) for each country listed on the Indonesia Stock Exchange. Third, we then analyse the statistical descriptive, correlation in terms of its value and graphical plot at both the univariate and multivariate levels. Findings — Our thorough literature review suggests that the classic CRR and the ROIC are theoretically consistent with the principles of pricing in Islamic finance. This is also empirically confirmed by employing the Indonesian data, where we observe a high correlation between CRR (ROIC) and short-term (long-term) economic macroeconomic indicators. Originality — To the best of our knowledge, this is the first study exploring the possibility of CRR and ROIC as Islamic benchmark pricing. Research limitations/implications — The spatial focus of this study is Indonesia. While the robustness check has incorporated the case of the US. Other countries may have different structures and institutions of the financial markets. Practical implications — The classic measures of firm performance CRR and ROIC prove useful to be alternatives to Islamic benchmarking both theoretically and empirically.

Suggested Citation

  • Jardine A. Husman & Ali Sakti & Dahnila Dahlan & Imam Wahyudi Indrawan & Zaäfri A. Husodo & Nur Dhani Hendranastiti & Muhammad Budi Prasetyo & Wahyu Jatmiko, 2022. "On The Development Of The Islamic Benchmark Rate: An Indonesian Case," Working Papers WP/04/2022, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp042022
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Asset Pricing; Cash Recovery Rate; Islamic Benchmark Rate; Real Business Return; Return on Invested Capital;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

    NEP fields

    This paper has been announced in the following NEP Reports:

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