Why interest-rate cannot benchmark for Islamic financial product pricing?

Abstract

Purpose – The purpose of this paper is to emphasize that interest-rate benchmark cannot be used for pricing of Islamic financial products. This paper will help in pricing basis for Islamic financial products, which are currently based on interest-rate benchmarks. Shariyah perspective and ground realities are considered as evident to the viewpoint. Design/methodology/approach – Viewpoint has been evident through comparison of conventional and Islamic financial product pricing, and through comparison of interest rate with macroeconomic indicators to analyze whether interest really represent economy, since Islamic finance based on real economic activities. Findings – It has been analyzed that interest based benchmarks do not represent real economic activities. Originality/value – This paper brings new light to the product development in Islamic financial instruments and institutions. Islamic finance should have its own footings in terms of product development.