Hey hey hey...Mr TK convert to Mussalman...

He and Mr Chief is brother...Ayoo hear dis pot solt Mr TK talkin bout Islamic Finance. Whah he know bout Islamic finance? Hey hey hey...

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Islamic finance and the US$900 million resource envelope from IsDB

Initially it was announced that Guyana will borrow US$900 million credit from the Islamic Development Bank (IsDB). However, the Minister of Finance clarified that the US$900 million is not automatically available. He noted that the government has to come up with projects consistent with the lending mandate of IsDB. Therefore, they used the term resource envelope, which means the line of financing is available if the government can come up with projects acceptable and consistent with the lending mandate of IsDB. In that sense, therefore, the money does not add to the external debt until the government borrows the funds.

IsDB lending has to be consistent with rules of Shari’ah, which is the foundation of Islamic finance and economics. The projects chosen by the Guyana government will have to be Shari’ah compliant. I find Islamic finance to be very interesting. It is a growing field of study and subfield of Islamic economics. It is definitely a subfield of the very broad subject of economics, which is mainly based on Western thought. Several non-Muslim economists often do research in the area of Islamic finance. I have also been discussing the features of Islamic finance with a few of my Middle Eastern students. I will use this column to outline the three core principles of Islamic finance and explain some differences with conventional Western finance. There are some sound reasons why the Guyana government may want to utilize this source of finance.

The first principle of Islamic finance is the principle of equity, which promotes joint ownership of an asset. The principle promotes profit and loss sharing instead of interest on debt, which is prohibited. The idea of equity holds that financing should take the form of partnerships in which the partners share profits and losses depending on their equity share. It requires all parties in the contract to disclose information to minimize uncertainty. This requirement is a moral responsibility. The idea here is to address the information problems inherent in financial contracts, regardless of whether they are Western or Islamic.

Interest in conventional finance is based on time passing to maturity, risk and liquidity. Interest for time passing is not allowed in Islamic finance (IF). Therefore, pricing an asset is fundamentally different than in conventional finance. Fundamental to Western finance is the notion that a dollar received today is not the same as a dollar received in the future. The dollar received today will grow at a rate of interest, something that cannot occur under IF. However, a fee, akin to interest, can be charged under IF to cover the administrative expense of a bank.

This interest fee is a markup over administrative cost and it does not relate to the maturity structure of the loan or bond. The markup, unlike in conventional economic models, cannot increase due to a delay and remains predetermined by contract. I believe this provides an opportunity for countries like Guyana that should not be borrowing in foreign private capital markets, at variable interest, at this stage of their development.

If Guyana is going to find projects that are consistent with Shari’ah, the government will have to figure out ways by which IsDB becomes an equity partner. Not all projects will generate a stream of profits. For example, pure public goods will not make profits. In conventional economics, a pure public good is one where we cannot charge a price (owing to the free-rider problem) and when one person uses the good it still remains for others to use. In the Guyana context, drainage of the coastal plain by GuySuCo is a classic public good that the free market will be reluctant to produce. In the colonial days, the private farmers provided their own drainage. They incurred this cost because they were able to suppress labour cost through slavery and eventually indentureship.

The second principle of IF is that of ownership. A basic stipulation from Shari’ah says “do not sell what you do not own.” This principle reinforces the equity principle outlined above. It further implies that debt is kept to a minimum under IF as there has to be some equity partnership between a bank and borrower or a group of partner investors. In other words, suppliers of funds become investors. However, this will require some creativity on the part of the Guyana government to find projects which will generate a profit revenue stream for IsDB and the Guyana government to share.

In Western finance it is normal to invest with borrowed funds. Borrowed funds provide leverage which can make a lot of money when asset prices are increasing. However, leverage will eventually sting like a centipede and the system is prone to financial crises after a long period of buildup. Borrowed funds can also be used to drive the price of a security – for example, the share of a company – downward for the purpose of buying the stock cheap, a process known as short selling. This would not be allowed under IF. Nevertheless, practices such as short selling under conventional finance has the advantage of adding liquidity to financial markets. It should be noted that this kind of liquidity is different from the concept of excess liquid assets which are prevalent in Guyana and other developing countries. I have done a significant amount of academic work on the excess liquidity phenomenon across developing and emerging economies.

The third principle of IF is known as the principle of participation. This principle promotes shared economic activities. For example, under conventional finance the bank extends a mortgage to the borrower for buying a home. The borrower pays back the principal and interest, at a locked in or variable interest rate over some time period. This mortgage is a debt instrument. Under IF, the bank buys the home and sells it to the homeowner at a profit payable in instalments. Both the home owner and the bank are equity participants. Some sceptics might see the profit as a form of interest. Mathematically, one can show the profit works as an interest. That may be true, but the ownership structure is different. Furthermore, both bank and homeowner share the risk involved in the transaction.

The Guyana government will have to think carefully about projects that meet these three principles. I do not believe this is particularly difficult. They may want to seek the help of an Islamic scholar who understands the technical aspects of both Islamic and conventional finance. This resource envelope presents a good opportunity for the government to start financing crucial goods and services before the uncertain oil monies start coming. The projects, however, will have to promote equity, participation and ownership.

Obviously, the moral ethos of Shari’ah prohibits alcohol, drugs, gambling and the like. Those are easy to exclude. Since the interest is a fee that is predetermined, the government could at minimum use the funds for social protection, which seems to be the plan. When the funds are used for this purpose, the Guyana external debt expands. The Guyana government may still need to compare the percentage of the fee with conventional interest, but I believe this might still be lower than bilateral, multilateral and private sources.

If, however, IsDB becomes equity owner in some quasi-public goods that can generate a profit stream, such financing is not really a debt. It behaves and resembles a foreign direct investment. Can the Guyana government utilize this resource envelope so that what appears to be a debt is akin to a FDI, thus not increasing the external debt? It should not be that difficult to conceptualize these products. These quasi-public goods have elements of both public and private goods. The important point is mixed goods can generate a stream of revenues which can promote equity participation of IsDB. Pure public goods cannot.

 

Copyright © 2017 Stabroek News. All rights reserved.

Original Post
Django posted:

Bhai Labba,that's was gud explanation by pot solt Mr TK,  how the IsDB does operate.

Irfaan Ali got his own spin

Guyana on the road to exorbitant debt levels – Ali

Jagdeo got his spin too

https://guyanatimesgy.com/jagd...-to-borrow-billions/

Was looking for the spin from the PPP Economic Adviser,the search was too long suh i gave up.

I struggle to understand how, given the way it’s works, the IsDB can play a major role in national infrastructure projects.  

IsDB model requires an equity interest.  That’s the disaster of a model of the BBce bridge!

ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

PPP has to go beg again to get debt forgiveness so the Guyanese people would not starve. History repeating itself.

ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

so, Guyana population is now 1000 people

what the #@**%!* is the level of education on this board?

and 2 other illiterates ‘like’ this

smfh

 

Baseman posted:
Django posted:

Bhai Labba,that's was gud explanation by pot solt Mr TK,  how the IsDB does operate.

Irfaan Ali got his own spin

Guyana on the road to exorbitant debt levels – Ali

Jagdeo got his spin too

https://guyanatimesgy.com/jagd...-to-borrow-billions/

Was looking for the spin from the PPP Economic Adviser,the search was too long suh i gave up.

I struggle to understand how, given the way it’s works, the IsDB can play a major role in national infrastructure projects.  

IsDB model requires an equity interest.  That’s the disaster of a model of the BBce bridge!

Na de Wurl Bank dey tell dem doan mek de Berbice bridge since dey doan have de numbers foh sustain am. Govt had to be partna foh am to wuk. Wurl Bank seh use two flat synchronise roll on roll off ferry until yuh get de numba. Hey hey hey...

Labba posted:
Baseman posted:

 

I struggle to understand how, given the way it’s works, the IsDB can play a major role in national infrastructure projects.  

IsDB model requires an equity interest.  That’s the disaster of a model of the BBce bridge!

Na de Wurl Bank dey tell dem doan mek de Berbice bridge since dey doan have de numbers foh sustain am. Govt had to be partna foh am to wuk. Wurl Bank seh use two flat synchronise roll on roll off ferry until yuh get de numba. Hey hey hey...

I saw those types of ferries ⛴ in use in Europe, very fast and efficient. 

ronan posted:
ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

so, Guyana population is now 1000 people

what the #@**%!* is the level of education on this board?

and 2 other illiterates ‘like’ this

smfh

 

You does see wid cack eye

skeldon_man posted:
ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

PPP has to go beg again to get debt forgiveness so the Guyanese people would not starve. History repeating itself.

Under the PPP Guyana became one of the Heavily Indebted Poor Country (HIPC) and because of that some of their debt was AUTOMATICALLY forgiven. The PPP didn't beg to get Guyana out of Debt they put Guyana in a position so poor that they were automatically forgiven

Pointblank posted:
skeldon_man posted:
ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

PPP has to go beg again to get debt forgiveness so the Guyanese people would not starve. History repeating itself.

Under the PPP Guyana became one of the Heavily Indebted Poor Country (HIPC) and because of that some of their debt was AUTOMATICALLY forgiven. The PPP didn't beg to get Guyana out of Debt they put Guyana in a position so poor that they were automatically forgiven

Dumb comment.  Banna, stick with preaching your hate sermons in Queens!

Baseman posted:
Pointblank posted:
skeldon_man posted:
ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

PPP has to go beg again to get debt forgiveness so the Guyanese people would not starve. History repeating itself.

Under the PPP Guyana became one of the Heavily Indebted Poor Country (HIPC) and because of that some of their debt was AUTOMATICALLY forgiven. The PPP didn't beg to get Guyana out of Debt they put Guyana in a position so poor that they were automatically forgiven

Dumb comment.  Banna, stick with preaching your hate sermons in Queens!

Dumb because the truth makes BJ and the PPP looks bad

Pointblank posted:
Baseman posted:
Pointblank posted:

Under the PPP Guyana became one of the Heavily Indebted Poor Country (HIPC) and because of that some of their debt was AUTOMATICALLY forgiven. The PPP didn't beg to get Guyana out of Debt they put Guyana in a position so poor that they were automatically forgiven

Dumb comment.  Banna, stick with preaching your hate sermons in Queens!

Dumb because the truth makes BJ and the PPP looks bad

You are dumb if you think the Govt can just fold their arms and hope for debt forgiveness!  You are dumb. 

Try using that to raise funds for that bankrupt mosque alyuh building over deh!  Even the IsDB would walk on by!

ball posted:

One billion in debt for a population less than one million, each and every citizen owes one million plus, them gun gat fo pay till them great great great grand pickney debt out. 

Ball is on the ball. There is no way that a country like Guyana with such a small population and so much gold should have such a large debt.

I liked Ball’s sentiment about the size of the line of credit although his math was a bit off. The Coalition government is like the Trump administration. They start out doing everything in secrecy and when it is made public, they come up with the lamest explanations. 

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