Culture, finance and markets in Saudi Arabia

Managerial Finance
Culture, finance and markets in Saudi Arabia

Masudul Alam ChoudhurySulaiman A. Al-Sakran
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Volume 27 Number 10/11 2001 25
Culture, Finance and Markets in Saudi Arabia

by Masudul Alam Choudhury, Professor of Finance & Economics, College of Industrial
Management, King Fahd University of Petroleum & Minerals, Dhahran 31261, Saudi
Arabia and Sulaiman A.Al-Sakran Assistant Professor & Chairman, Department of Fi-
nance & Economics, College of Industrial Management, King Fahd University of Petro-
leum & Minerals, Dhahran 31262, Saudi Arabia.
Abstract
A theoretical and empirical study is undertaken to bring out the nature of Islamic political
economy in view of its underlying praxis of interactions among socio-cultural (religious)

elements, finance and the economy. The case study of Saudi Arabia in this regard sup-
ports the several ramifications of the Islamic political economy. Thus we argue why it is
both economically rational and valid on socio-cultural grounds to uphold equity-based fi-
nancing in favour of interest-bearing bonds and debt instruments in Saudi Arabia. The pa-
per presents a view on a topic of choice of financial instruments in the corporate capital
structure that is presently receiving fresh attention in emerging corporatism of Saudi Ara-
bia. The conclusion of the paper is that equity-based financing should turn out to be the
winner in this corporate choice. This conclusion is supported both by the socio-cultural
dynamics of Saudi society, economy and institution and by the rationale of the theory of
Islamic political economy.
The evolution of Saudi Arabia from a primary oil producing country into a modern
economy has opened up immense potentiality to expand her financial and economic ac-
tivities. Saudi Arabia is a Muslim country governed by the tenets of Islamic Law
(Shari’ah). She thereby carries with her the many socio-cultural and economic implica-
tions that the Islamic Law would bear upon these functions. It is precisely such intricate
questions in the perspectives of Islamic Law vis a vis the various controversies surround-
ing aspects of modernism, that make the study of the interrelationship among finance,
money and the economy along with the attenuating socio-cultural dynamics of the nation,
so interesting a study under her political economy of culture, markets and the challenges
of modernity.
The objective of this paper is to investigate such a range of politico-economic di-

mensions of Saudi Arabia in the light of the theory and reality of Islamic aspects of fi-
nance, money, institution and the economy. Over all of these aspects of interactions there
reign the socio-cultural dynamics that determine the validity of Islamic Law with regards
to the policies and realities of the Saudi political economy. We are defining the term
‘political economy’ in this sense of extensive interactions among economic forces, finan-
cial instruments, money and institutions within the socio-cultural background. The tenets
of Islamic Law in these respects provide the governing directions of change. Hence along
with this study of the politico-economic perspectives we need also to examine the reali-
ties of contrast or compatibility between Islamic Law and modernity. This is a question
that will inevitably define the directions of change that Saudi political economy will un-
dergo in the coming times as globalization and its international institutional implications
gear Saudi Arabia’s place, role and commitments in the global order.
Managerial Finance 26
Theoretical perspectives of a political economy formed and governed by Islamic

Law (Shar’iah)
We will begin by examining the position of Islamic Law (Shari’ah) on rule formation
within an extensively relational domain of society, economy and socio-cultural values. In
theoretical terms, Shari’ah is mandated to attain human well-being by focusing on five
goals. These are, the protection of Islamic belief (Deen), moderation of human ego
(Nafs), the advancement of reason (Aql), protection of property (Mal), and perpetuation
of the Islamic generations (Nasl). The Islamic Laws in these perspectives cannot be
thought to be a simple bundle of rules for enactment. On the contrary, it is the essence of
Shari’ah emanating as it must from the Qur’an, that an extensively relational order
among the multi-dimensional possibilities of the above five attributes must be kept fore-
most in mind when deriving rules of guidance and policy. Such a medium of derivation of
legal injunctions for legislative purposes by Shari’ah is a complex process, embodying in

it the process the interactions in the most detailed sets of issues and problems that can fall
upon the derivation of the rules. Thus, the essence of Shari’ah is premised on the immuta-
bility of unity of God as representing the command and guidance of unity in knowledge
and its worldly becoming. This episteme is derived from the Qur’an, the prophetic guid-
ance (Sunnah) and explicated by extensive discourse among the participants in rule mak-
ing to reach consensus (Ijma) on decisions over choices.
All these actions and responses followed by their dynamic post-evaluation for
change through consensus, but never annulling the foundations of Qur’an, Sunnah and
the principle of unity thereby, become the institutional culture of choice and decision-
making. The institution so empowered to discourse such issues across the most decentral-
ized representations from society at large, is called the Shura. We are tempted to name
the extensively discourse and consensus related process of rule making premised on the
epistemology of Qur’an, followed by the ontology of Sunnah and the authoritative deri-
vation of rules by Ijma — called Ijtihad — as the Shuratic Process of knowledge forma-
tion.
The emphasis here is on the process oriented decision-making and rule-making,
consensus formation and evolutionary change arising therefrom, the embodiment of dis-
courses, actions and responses within the Shura. Furthermore, if knowledge formation is
the cause and effect of such interactions, leading to integration (consensus) and thereby to
creative evolution, then we can infer from this that Shari’ah grounds its five attributes in
an extensively relational worldview. Through such a relational order are created the
meaning, purpose and transformation of the social, economic and other human perspec-
tives. Thereby, the process stated above bestows the freedom for the multitudes of decen-
tralized Shuras towards coordinating and regimenting together their rules for affirmation
and change.
The idea of political economy is thus born in the light of the relational and exten-
sively interactive, integrative and evolutionary worldview in which Shari’ah guides the
road to change (Choudhury, 1998). In this same political economy the Shura gives the
unbounded latitude of freedom for participation, discourse and change, given the rela-
tional perspectives among the five attributes of Shari’ah. Upon this process-oriented
worldview one can inject the meaning of modernity. The meaning of modernity is then
similar to that given by Giddens, who understands by this concept to be a creative evolu-
tion across ever-changing strings of human possibilities, wherein the new yields to still
newer in a continuum (Giddens, 1983). In the perspective of Shari’ah we note its mean-
ing of modernity to be creative evolution within the framework of unity of knowledge re-
maining immutable at the premise of Islamic epistemology and ontology and being ever
perpetuated and sustained. The laws, guidance and the emerging strings of rules along the
path of creative evolution are enforced by the instruments of Shari’ah pertaining to the
details of the human world in manifesting the precept of unity in the extensively rela-
tional order that Shari’ah unravels. Unity of knowledge and its creative manifestation
through the medium of relations and instrumentation form the basis of modernity in the
Islamic meaning of political economy.
Instruments of Islamic Law in the political economy
We must now examine how the instruments of Islamic Law help in attaining the interac-
tive, integrative and creatively evolutionary interrelations in the political economy as the
sign of unity of knowledge attained by cause and effect of its immutable epistemology of
Divine Oneness. Such interrelations must now be studied with respect to financial instru-
ments, economy and the institution of Shura.
A central goal of Shari’ah on social, economic and financial matters is the abolition
of interest rates as the price of money in all its forms. The meaning of this centrally im-
portant requirement within the relational order among the five attributes of Shari’ah is to
be understood on the basis of unity. It does not matter from which vantage point we start
to enact the program of abolition of interest. That is, from society to economy or vice
versa. The result would ultimately be convergent.
Why abolition of interest according to Islamic Law?
First let us examine the social perspective of this question. Islamic Law perceives interest
as a claim on money or goods in excess of its due worth, when there is no productive use
of that money in place to bring about a material asset. Thus, in the charge of interest that
the lender imposes upon the borrower, a cost is levied for a subjective notion of risk when
the venture has not actually materialized. The same risk is not diversified between the
lenders and the borrowers through real economic activities. Now the higher the risk in a
venture the more costly it becomes to secure venture capital at given interest rates. For
the very poor, their dire need for capital but the absence of the possibility to reduce risk,
work against the prospects of loan guarantee. The social effects of interest are then seen
to be an unproductive claim on unrealized ventures and a cost on the borrower that im-
pedes the flow of financial capability, particularly to the marginal borrower. In the end,
the obstruction to lend on terms of mutual participation to mobilize resources and share
risk rather than on the basis of interest rates, causes inequitable distribution of wealth,
ownership, entitlement and empowerment.
Secondly, in economic terms interest is a payment on idle capital, that is on sav-

ings. It is not a return on productive resource mobilization into real and active economic
activities. Consequently, money now forms a commodity that is held in two forms, either
as cash-balances or as bonds both offering interest rates. These two instruments ‘subst-
itute’ each other with respect to the movements on bond yield relative to interest rates. It
is ironical that the cost of capital should be a return on savings, when it is precisely the
savings, formed by the inducement of interest rates, that cause withdrawal from resource
mobilization capability over a period of time when the savings are held in the form of li-
quidity. During the period that savings are held as liquidity, money ceases to play its im-
portant role in realizing economic activity by the interest-based inducement of savings as
withdrawal works against the alternative to perpetually circulate capital in productive
mobilization. Indeed. these are arguments similar to those that were effectively put forth
by Keynes as he saw the role of interest rate to be an impediment in realizing the full
measure of the income multiplier. But Keynes had to succumb to the rigid reality of the
interest-centered British economy. He thus settled for the liquidity trap.
Thirdly, in the institutional sense, which to us is the Shura in terms of its promotion
of the relational dynamics for realizing unity among the entities of the political economy,
we note that there comes about a break in the interrelationship between society and econ-
omy when interest rate prevails. Participation is the sign of unity in the case of social be-
coming. It can be realized when product and risk diversification can take place with the
increasing number of venturists together undertaking resource mobilization in productive
outlets. Here is where the regressive nature of interest rate caused by the presence of in-
centive to save is replaced by the active and continuous mobilization of capital. Conse-
quently, money combines with the real economy as a medium to promote productive
resource mobilization. The social aspect of participation among all forms of ventures be-
ing activated by the replacement of interest rate by participatory instruments, is next com-
bined with product and risk diversification to enhance the productive capacity of the
active real economy. Society and economy are thus linked together by replacing interest
rate with a cogent set of participatory instruments in the Islamic political economy.
Islamic political economy is now seen as the system that realizes interactions
among the five attributes of Shari’ah. That is, organic unity is causally derived from the
premise of divine unity and is manifested in the unifying function between money and the
real economy through extensive participation among the agents of change. This is the
premise of Deen as epistemic unity in Shari’ah mentioned earlier. The greed for accumu-
lating capital by the unfair medium of lending capital while not mobilizing it in produc-
tive activities, is deterred by the replacement of interest rate by participatory instruments
according to Shari’ah. This is the premise of subduing Nafs in the lender, against the un-
due passion to accumulate capital by those who subjectively capitalize at high risk. The
severance of money from its otherwise intrinsic link with the economy for obtaining pro-
ductive gains, when interest rate causes substitution between productive venture and the
holding of money in the form of savings, is an utterly irrational road to prosperity. This is
to say that Aql (reason) is lost, and Shari’ah restores it from the doors of replacing interest
rate by the participatory instruments. Property, entitlement and empowerment are real-
ized with participation and productive mobilization of resources linking money with the
real economy, when participatory instruments replace the rate of interest as a subjective
price of money. This is the same as the protection of property rights against the presence
of interest. The erosion of real value on the other hand, works equally against both the
poor and the rich in their own capacities to gain from the full mobilization of resources in
an active real economy. Such is the adverse effect of interest rate against the protection of
property rights, Mal. Thus interest rate is an equally irrational and irrelevant instrument in
capitalizing intergenerational flows of economic and financial returns by discounting fu-
ture flows. That is because the interaction between money and the real economy is not
known for the future. Only expectations exist, not actually realized values. Consequently,
no capitalization per se can be ascertained. It is then utterly meaningless and a social bur-
den to capitalize an asset by making the investor pay a subjective future value of money,
when one does not exist post hoc.
The arguments of Islamic political economy on interest rate remain independent of

the real against the nominal rate, the compound or effective against the simple rate, usury
against low interest. The reason for this uniformity of Shari’ah ruling on all forms of in-
terest is because of the altogether different nature of interactions and social as well as
economic arrangements that are caused by transforming money as a medium that remains
causally related with the real economy. The value of money then ceases to be based on a
price for money. Rather, this money value is determined by real transactions in the mar-
ket economy. Such a concept of endogenous money is essential in integrating the produc-
tive function of the economy with the concept of resource mobilization in meeting that
productive function by means of endogenous money. Interest rate cannot thereby prevail
in any such real economic contexts where money does not have an independent market of
its own. It remains tied to the market for tangibles (market exchange in goods and serv-
ices).
The praxis of Shari’ah in attaining the best form of social and economic ordering in
the absence of interest rate makes the acceptance of any form of interest unacceptable. In-
deed, in a political economy that is defined by its extensively participatory nature, risk
and product diversification coupled with the learning capacity among the social and eco-
nomic entities, must necessarily reduce risk, mobilize resources and promote production
and innovation. These are well-know to be the endogenous conditions for price, income
and employment stability in a growing economy (Roemer, 1986).
Finally, we note that the participatory instruments that replace interest rates for pro-
moting productive resource mobilization must also be conditional to seeking ethical and
moral outlets on the basis of social and distributive equity, harmony, decency and avoid-
ance of such ventures that are considered as socially repugnant. The individual decision
to mobilize resources in a participatory framework of the political economy governed by
the interrelationships among the five attributes of Shari’ah, is subsumed within the social
perspective. The guidance of Qur’an, Sunnah, Ijtihad and Ijma within the Shura institu-
tional framework constantly regulates this ethical and moral direction by its socially es-
tablished legitimacy attained through consensus and acceptance of such an institution.
We now obtain an ethical transformation of the interrelationships among socio-cultural
forces, institutions, markets and financial and monetary instruments.
We thus move on to examine the cultural, financial and economic interactions in an

Islamic political economy in comparative perspectives. The conceptual treatment in the
section below will indicate the extent to which Saudi Arabia practices or has remained
distanced from the dynamic perspectives of the Shuratic Process.
Some analytical issues in the relationships between financial markets and the econ-
omy
The interrelationship among equity financing, private bond issues and debt instruments in
corporate capital structure has been studied by Jean (1970), Schwartz (1959) and Modi-
gliani and Miller (1958). As a simple case, we will assume that bonds and fixed securities
are instruments to raise loanable capital by the corporation. Hence in this sense they must
be positively related to debt instrument in a corporation. When debt component of capital
structure increases, the rate of return on equity in the corporation falls, risk increases, and
with this the nominal interest rate also increases. Consequently, bonds and debt instru-
ments are intrinsically interest-based. Besides, equity and debt become inversely related
ceteris paribus1.
Besides, we also know that the growth rate of the value of a firm in terms of
equity-holders’ retained earning and cash dividends is a compound function of the rates
of change of retained earnings and earnings on common stocks (equity). The capitaliza-
tion of future discounted cash-flows from a stock issue requires the growth rate of the
firm’s value to be lower than the rate of interest rate (i.e. discount factor or cost of capi-
tal)2.
It is also well-known that in the case of risky returns, optimal capital structure of
the firm is explained by the expected utility of risk and return in view of the following
facts: Expected returns from risky portfolio is positively related to debt. This is so be-
cause increased debt brings about higher risk. The risk-averse firm then seeks a portfolio
that establishes positive relationship in risk-return behaviour. However, a change in the
expected rate of return caused by debt component remains negatively related to interest
cost, which increases with debt burden. This result implies that the equity component is
negatively related with interest cost and debt size in view of the absence of interest in eq-
uity financing and which otherwise, adversely affects bonds and debt financing in the
corporate capital structure3. The cost of capital related with bond and debt issues is a di-
rect function of interest rate, which signifies the risk-return behaviour of investors. Such a
cost of capital is referred to as the discount rate for cash-flows arising from bonds and
debt instruments.
The discount rate must remain higher than the growth rate of dividend cash-flows
over time in order to evaluate a convergent earnings stream. Therefore, the following re-
lationships among the rates of return and the discount rate must hold: An increase in the
rate of growth of dividends compounds along with the increasing rate of growth in equity
earnings and an increasing pay-out ratio associated with the rate of growth of earnings
from equity. These interrelationships among the various rates cause the relationship be-
tween the rates of change in dividends and equity earnings to remain positive.
On the contrary, for a capitalized cash-flow stream to be convergent in the valua-

tion sense, the growth rate of dividends must increase over time and the cost of capital
must be set at increasingly higher rates intertemporally. With such increasing discount
rates above the growth rates of cash-flows, permanently increasing risk and financial
costs must exist.
Beyond simply the capital structure of the firm, the risk associated with bond fi-
nancing can cause inefficiencies on an economy-wide scale. Transmission of the total
corporate risk is caused by the positive interrelationship among debt size, interest rates,
measured risk and financial cost. Each of these instruments is in turn linked with fixed in-
come securities and private bond issues. The cost of capital or discounting method now
becomes a pervasive mode of capitalizing income streams in corporations with high bond
and debt components.
We have pointed out in the case of interest-bearing financial instruments that par-
ticipation is minimized while the cost of capital unduly increases the risk of venture and
the possibility of borrowing capital. Such effects result in de-stabilization caused by an

economy-wide decline in equity-participation ventures when debt instruments are al-
lowed to prevail.
The recent global financial turmoil proved that the speculative motive for holding
cash-balances and the speculative ventures were the principal cause for the recent global
financial turmoil. Speculative instruments are direct functions of short-term rates of inter-
est caused by excess demand for financial liquidity. They replaced the productivity of eq-
uity markets and caused a fall on equity prices. Subsequently, interest rates rose
astronomically in the adversely affected economies causing real investments and produc-
tion to decline while risk and financial instability governed their future economic out-
look.
The resulting loss of real productivity raises cost of production. This leads to infla-
tion or an outflow of capital. Venture capital then needs to be raised by floating bonds,
which through the negative relationship between its own price and the interest rate on the
bond, introduces financial hedging. The interest rate instrument now becomes central to
monetary authorities. Money as liquidity on the one hand, and real assets on the other, are
then made to compete as choices between savings and productive investments. The real
sector now faces rising costs, low productivity and uncertainty in resource allocation, as
interest rate increases and bond prices fall. Such movements in the critical economic indi-
cators go against the prospect of a stable flow of dividends that could otherwise
strengthen the value of a firm. Stockholders’ wealth gets adversely affected. Such are the
economy-wide adverse effects of bond markets, interest transactions and debt structure
that adversely affect both economic efficiency and distributive equity at the economy-
wide level as opposed to the case of equity financing.
The alternative of equity financing and its effect on economic stability
Turning next to equity financing, we note that participation in and expansion of equity-
based ventures with good management techniques can diversify risk. Contrarily, interest
rates or similar costs of capital replace investment in real economic ventures by savings
in liquid assets. Stocks and companies are now floated by means of private bond issues.
Yet such bond issues are not necessarily backed by productivity gains in the real sector,
as the liquid savings replace investments in real assets. Consequently, the real sector and
the monetary sector become two distinct and competing sectors in raising corporation
capital. The financial sector vies for financial efficiency; the real sector aims at produc-
tivity and technical efficiency. The two sectors become disparate in a system where the
monetary sector and the real sector get de-linked by the separation between savings in li-
quidity and investment in real assets.
Resources required for a firm’s operations that could not be raised by productive
returns in real economic ventures are now raised by debt instruments. Debt provides lev-
erage to the firm’s cost of operations in such a situation of resource shortfall. In the
economy-wide sense, prevalence of debt instrument across corporations results in the sale
of private bonds. Bond issues replace equity instruments via the trade-off between inter-
est rate and the real rate of return. With resources thus substituted between bonds and eq-
uities, real economic productivity falls. In such circumstances, the government bears the
pressure either to finance the shortfall in national income by means of subsidies or to
adopt increased taxation to raise general revenue. Both of these options are socially
costly. In Saudi Arabia, the tax option is absent. Hence an increasing subsidy option
would reflect economic inefficiency in public resource allocation.
Conceptual approach to decision-making in a participatory capital market situation
In view of the absence of interest rates in the Islamic political economy and the inappro-
priateness of discounting method for capitalizing income streams from equity projects,
the usual utility analysis of risk and return for explaining risk-return behaviour of asset-
holders cannot be viable. With equity participation, where a large number of interactive
decision-making rules are constantly simulated, the risk-return curves would shift out-
wards as risk is lowered through portfolio diversification, participation and sectoral link-
ages that raise real productivity. Now expected returns increase. Consequently, with the
risk-return path becoming negatively sloped, the indifference curves relating to risk and
return become undefined or unstable with respect to risk-aversion behaviour. The coeffi-
cient of risk aversion becomes negative.
Faced with the failure in defining indifference curves when a well-determined
risk-return trade-off using discount rate is non-existent, as in the case of valuation using
equity financing, an alternative approach must be sought to evaluate risk and return and
for capitalization dividends cash-flows from equities. One such approach is the forward
simulative method, wherein interactive decision-making inputs between corporate man-
agers and shareholders in regards to decisions within joint ventures, are heuristically
simulated and then used empirically, institutionally and for policy making (Shakun
1988). We explain this method of financial resource allocation with respect to risk and re-
turn by means of Figure 1.
Figure 1 is used to explain the simulation consequence that results from learning in
participatory equity ventures. We note here that in the context of Islamic financial law on
replacing interest transactions (hence bonds, fixed security and debt financing) by equity
instrument, an extensive participation in decision-making is realized. This also causes
linkages among real sectoral opportunities to occur. Consequently, risk and product-
diversification is realized.
In Figure 1 the risk-return indifference curves are now shown by I1, I2,..., shifting
rightward as risk decreases and as expected return increases (shown by the direction of
arrows). Now the path of optimal risk-return combinations is shown by the curve of in-
verse relationship between risk and return, II. Consequently, the risk aversion coefficient
(A) in the expected utility function (E(U(X)))of risky return, X, becomes positive. These
results are quite contrary to the usual risk-aversion behaviour of an ‘economically ra-
tional’ neoclassical investor, where the expected utility function, E(U(X)) is given by the
expression,
E(U(X)) = E(X) – A.Var(X).
For optimal expected utility, dE(X)/dVar(X) = A < 0 must hold along II in the neoclassi-
cal sense of risk-return behaviour.
In the case of interactions introduced by decision-making of the Shuratic type men-
tioned earlier with regards to Islamic political economy, the X-variables in the above ex-
pression are augmented by the interactive parameter of learning. Hence, no optimal
concept can prevail. Optimality is replaced by simulation methods that are generated
through institutional discursions and post-evaluation followed by correctives. Economic

prediction in such a learning environment is subjected primarily to the parallel and more
important institution of sustaining the socio-cultural norm of knowledge formation in the
light of Shari’ah vis a vis the guidance of economic and social change. Short-run simula-
tions are then made to comply with this trajectory of change and sustainability.
Discursive decision-making and learning cause points like a1 ,a2 , a3 , …. In Figure
1. Such points are sensitized by interactive and coordinated decision-making process,
which we called the Shuratic Process for the Islamic political economy. These points be-
come learning points, and thereby, cannot be characterized as ‘optimum’ points of a risk-
return combination using the otherwise usual utility analysis. Instead, such decision-
making points are simulatively influenced by discursive participation, effective risk and
product diversification resulting from inter-sectoral linkages, wherein money and real
economic activities become causally interrelated. Such is a feature of participatory equity

financing as a case of participatory financial instrument. It is not to be found in the bond
market, which is based on interest- instrument having its attenuating problems of de-
linkage in the economy-wide sense.
Figure 1: Anomaly in the analytic of risk-return behaviour caused by simulation of learning in-
put in joint ventures (equities)
σX
I1 I2
I3
I
a1
a2
a3
Declining σX-curve by I
I
diversification and
participation
Declining sx-curve by
diversification and
participation
0 E(X)
Islamic politico-economic interrelationships among culture, finance and markets in

Saudi Arabia
In Saudi Arabia the stock market has remained less seriously affected by the general fi-
nancial turmoil in world capital markets. This has happened mainly due to her insulation
from speculative financing and by the socio-cultural preference among households to
hold much of their cash-balances in circulation (M1). The absence of speculative ven-
tures in an otherwise growing economy must obviously be supported by equity financing
of joint ventures. Equity financing has indeed proven to be in favour of enterprise devel-
opment in the private sector in Saudi Arabia. Privatization and a market-oriented eco-
nomic transformation have always been the policy goals of the Saudi Arabian
Government. This perspective has helped the Saudi commercial sector to mobilize funds
in joint venture funds. Besides, through her links with the global capital markets, the
Saudi Government has by and large promoted international joint ventures as well. Since
the volume of funds so mobilized is large, an equity financing base by and large always
helped in securing financial returns in world capital markets. In recent times besides, the
North American and European equity markets have been more stable than the South-East
Asian ones. Saudi Arabian investments in these western capital markets have yielded
relatively more secure returns. On the socio-cultural side in Saudi Arabia, the important
and effective Islamic factor of equity financing against interest-based private bonds and
debt financing in resource mobilization and financial policies, managed to sustain a vital
real sectoral investment with low inflation and high productivity economy-wide.
Al-Sakran points out that fixed income securities and private bond issues have not
received a good deal of attention in Saudi Arabia (Al-Sakran, 1999), although there is
presently a reconsideration of this matter at the corporate level. See Appendix for a sur-
vey result on the levels of attractiveness of different kinds of financing instruments in
Saudi Arabia. On the contrary, it is remarkable that equity financing, joint ventures and
government bonds, which are also forms of equity participation, have remained tradition-
ally the popular modes of financing investments. From our foregoing arguments and evi-
dence we infer that there are good reasons for the choice of equity-based financing as
opposed to private bond issues in Saudi Arabia.
Empirical inferences derived from the capital structure of commercial banks in

Saudi Arabia
In this section of the paper we will examine the empirical validity of our theoretical argu-
ments showing why commercial bond issues carrying interest rates have not gained
prominence in Saudi Arabia for good reasons. Supporting the theoretical part of this pa-
per, the empirical evidence shows that the greater prominence of government bonds (eq-
uities) in commercial bank capital structure, that carry no interest rates and promote joint
ventures both between the private and public sectors as well as within the public sector,
have had the positive effect in realizing risk-diversification, productivity gains and stable
financial environment in Saudi Arabia. Such equities have also managed to keep the
Saudi capital market insulated from the financial turmoil of recent times.
From the analysis of financial structure of Saudi commercial banks in recent times
and the implications that government bonds have on monetary policy, we infer the devel-
opmental effect of such a state of the Saudi financial capital structure in recent years. The
analysis of empirical evidence leads us to infer that macroeconomic policies have been
developed in a cogent way in accordance with the marginal role of interest-based financ-
ing in Saudi Arabia. Price and economic stability with a promising widening of financial
capital through government bonds in equity financing and joint ventures is the natural
consequence of a socio-economic outlook on substituting loanable funds through the sup-
ply of promissory notes (free reserves and hence credit multiplier) by venture capital in
real economic activities.
We find a clear indication that government bonds (which are public equities) as op-
posed to private sector bonds and treasury bills comprised the principal source of invest-
ments in Saudi Arabia. The composition of government bond holding marked an
increasingly higher proportion of the total capital structure of banks in Saudi Arabia.
When viewed in terms of total assets of Saudi commercial banks it is also clear that gov-
ernment bonds, which are forms of equity issues in Saudi Arabia, have played the major
role in gross capital formation. Thus bank savings were being mobilized by means of
capital investments in government sponsored projects. Hence the trend in the capital
structure of Saudi banks, financial profitability and the levels of risk and return for enter-
prises and household savers was significantly determined by the outlet of investments
done through government bonds as an equity-based dominant factor in total investment.
Government bonds when mobilized within Saudi Arabia by way of capital project
expansion and privatized projects that have gained momentum under the Sixth Develop-
ment Plan, are based on interest-free financing. In the light of Table 1, it is clear that re-
source mobilization in the private sector has increased phenomenally. This is indicated by
claims on the private sector activities. The value of private claims has remained much
higher than the value of claims on public sector activities. The same fact is indicated by a
less than substantial amount of bank credits being allocated to government and state en-
terprises. Hence the returns from resource mobilization in joint ventures must be over-
whelmingly coming from private sector activities that are seen to increasingly hold
government bonds that are sold to private entrepreneurs for privatization purpose. All of
such goals and focus are in conformity with the Sixth Development Plan (Europa 1998).
The Saudi Government is well-known to hold large joint ventures with foreign cor-
porations. Table 3 shows the assets of some of these banks that are established by joint
ventures with foreign banks in comparison to those of national origin. But despite these
large joint venture banks we note that the national banks held SR217.2 billions of assets
in 1996. This constituted 62.22 per cent of the total assets of commercial banks in Saudi
Arabia in 1996. On the other hand, we note a much smaller share of loans in the liabilities
of all banks in Saudi Arabia. Since loans mainly carry interest rates, whereas joint ven-
tures yield profit-sharing rates of returns on productive ventures, it is implied that the
Saudi financial sector is investment prone. The inference then is that equity financing as
opposed to bond financing based on interest rates, must be the major outlet for resource
mobilization in Saudi Arabia.
The importance of Saudi joint ventures with foreign sources nonetheless is also to
be read off the trend in foreign assets and liabilities. The fact that foreign assets have re-
mained substantially higher than foreign liabilities indicates that Saudi Arabia experi-
enced net foreign investment inflow between 1991 and 1995. Such a trend when
combined with the implication on equity financing through resource mobilization in joint
ventures, points to productive returns in real economic activities with foreign firms. The
Table 1: Principal variables in the balance sheet of commercial banks (SR billions)
1991 1992 1993 1994 1995
Reserves 10.462 10.461 11.271 11.648 11.180

Free 3.192 2.721 3.139 3.446 n.a.
Statutory 7.270 7.740 8.132 8.202 n.a.
Foreign assets 118.961 106.372 111.007 97.144 97.970

Claims on 73.616 87.160 102.740 113.693 121.150
private sector
Claims on 40.769 62.638 66.063 76.960 76.730
public sector
Bank credita 15.953 24.722 22.602 26.930 n.a.

Government 9.375 16.906 11.906 16.275 n.a.
State Enterprise 6.578 7.816 10.696 10.655 n.a.
Investmentsb 24.816 37.916 43.461 50.030 n.a.
Unclassified 14.532 8.561 12.634 13.348 n.a.

assets
Total assets 58,330 275.192 303.715 312.793 307.030
Demand
deposits 75.850 84.160 82.268 84.520 81.380
Quasi- 95.372 93.248 101.081 103.145 115.554
monetary
deposits
Time & 44.623 46.325 47.892 51.417 n.a.
Savings
Foreign 45.343 41.179 48.343 47.094 46.040
currency
Deposits for 3.528 3.876 3.067 2.888 n.a.
Letters of Credit
Guarantee 1.878 1.868 1.779 1.746 n.a.
Deposits
Foreign 27.936 32.509 37.283 39.150 39.680

liabilities
Capital 18.783 24.457 30.193 33.313 39.250

accounts
Unclassified 40.389 40.818 52.890 52.665 31.166

liabilities
Total liabilities 258.330 275.192 303.715 312.793 307.030

a
Includes loans and advances.
b
Includes Treasury bills and Government bonds.
Source: Economist Intelligence Unit, Country Analysis 1999.

Table 2: Financial structure of banks in Saudi Arabia (SR in billions)
1991 1992 1993 1994 1995 1996a 1997a 1998a

1
(1) Bank credit 15.953 24.722 22.602 26.930 n.a. 16.7 20.9 23.36
(2) Investments2 24.816 37.916 43.461 50.030 n.a. 65.2 83.2 89.8
(3) Treasury bills3 N.A. 8.7 7.3 4.0
(4) Govt. bonds3 N.A. 56.5 75.9 85.8
Total (1)+(2)+(4)
--------------------------------------------------------------------------------------------
1
includes loans and advances.
2
includes treasury bills and government bonds.
a
These are fourth quarter readings.
Source: Economist Intelligence Unit, Country Report 1999.
Table 3: Bank assets and loans in Saudi Arabia during January-June, 1996
(SR billions)
Loans Assets
1995 1996 1995 1996
Al-Rajhi n.a. n.a. 30.3 33.2
Saudi American 16.3 14.2 42.0 41.1
Riyadh 18.4 15.9 54.0 50.4
National Commercial n.a. 38.8 n.a. 76.5
Arab National 10.7 9.6 31.0 32.5
Saudi British 9.7 9.7 27.3 29.9
Saudi Fransi 10.0 8.9 26.2 27.5
United Saudi Commercial 4.1 4.8 11.1 11.2
Saudi Cairo 5.8 4.3 21.1 17.7
Saudi Hollandi 6.9 6.8 14.1 15.7
Saudi Investment 3.3 3.6 7.7 9.4
Bank al-Jazira 1.3 1.1 3.7 4.0
Total 86.5 117.7 268.5 272.6
----------------------------------------------------------------------------------
Source: Economist Intelligence Unit, Country Study 1999.
The importance of Saudi joint ventures with foreign sources nonetheless is also to
be read off the trend in foreign assets and liabilities. The fact that foreign assets have re-
mained substantially higher than foreign liabilities indicates that Saudi Arabia experi-
enced net foreign investment inflow between 1991 and 1995. Such a trend when
combined with the implication on equity financing through resource mobilization in joint
ventures, points to productive returns in real economic activities with foreign firms. The
private sector activities are thus further enhanced through the equity-based capital struc-
ture of Saudi banks.
Resource mobilization, money creation and risk-diversification in Saudi Arabia

through commercial banks: the importance of equity financing in Islamic perspec-
tives
Another implication defending the empirical inference on the important role played by
resource mobilization through joint ventures in Saudi Arabia comes by noting the trends
in free reserves and statutory reserves. Reserves of commercial banks have remained low
in comparison to total investment demand and investments as such. The latter have been
adequately financed by commercial bank savings. Total commercial bank reserves in-
creased on the average by 3.78 per cent annually between 1991 and 1994. Free reserves
increased by 2.65 per cent, statutory reserves by 4.27 percent, annually for the same
time-period. On the other hand, annually between 1991 and 1994, investments increased
by 34.23 per cent, savings and time deposits increased by 5.08 per cent but provided a
substantial volume of funds to finance investment.
Consequently, the role played by promissory notes in money creation through com-
mercial banks was a relatively small one compared to funds mobilized in joint venture in-
vestments. This fact is further indicated by the low rate of change in free reserves. The
smaller role played by promissory notes for loanable capital as opposed to liquidity pro-
vided by joint ventures and commercial bank savings as sources of financing, is a logical
way for establishing interest-free government bond market for equity financing of pro-
ductive projects. The same mechanism is found to be enhanced by healthy cooperation
between the private and public sectors with an active mobilization of funds through real
and productive economic projects.
A lower rate of growth of credit creation is a sure way of containing interest-based

financing. In the short-run this is tantamount to an effective control of speculative portfo-
lio investments. Indeed, the uncertainty in capital markets caused by risky speculative
portfolio, is the result of the relationship of capital structure to loanable capital, as op-
posed to a mitigating relationship that can be gained through venture capital. In the latter
case, short-run ventures are replaced by long-run investment outlets, like the ones that
can be generated by real economic activities in the midst of joint ventures both domesti-
cally and with foreign investors providing direct foreign investments. All such features
are found to appear in the case of Saudi Arabia through the financing of ventures by eq-
uity financing with government bonds.
The effective control of interest-based financing in Saudi Arabia is thereby found

to be a natural corollary to the interrelationship between government bonds, real eco-
nomic projects and joint venture financing for realizing such projects. Furthermore, we
now note that the effective control of risk in projects with respect to venture capital fi-
nancing in contrast to the smaller role played by promissory notes in financing loanable
capital, causes long-term investments to be encouraged as opposed to short-run invest-

ments. In world capital markets short-run portfolios when governed by interest rate
mechanism have been found to be the speculative ones and are highly risky. Through
long-term investments in terms of their inverse relationship with interest rates and direct
relationship with joint venture financing, the Saudi economy is found to have remained
by and large secure from unusual effects of world financial turmoil in recent times.
Inference for the relations of Islamic political economy from empirical evidence
Here then is an important lesson to learn on risk-diversification of the portfolio by the

choice of alternatives and the mode of financing such alternatives. As we have pointed
out in the theoretical part of this paper, the nature of interactions between financial instru-
ments and socio-economic variables for identifying proper economic choices, is a matter
of knowledge sharing, appropriate policy regimes and effective institutional guidance for
the decision-making bodies within organizations governed by Shuras. The policy pa-
rameters thus become embedded in a social well-being criterion function that can be de-
veloped and used for evaluating the beneficial nature of complementarity between the
choices of instruments, variables and alternatives. This observation that stems from the
theoretical analysis of Islamic political economy however is not found to be practiced in
all organizations in Saudi Arabia. Thus a zealous closeness to a process oriented
decision-making approach on politico-economic matters and within organizations at all
levels, is not fully adopted presently in Saudi Arabia.
Socio-economic interactions of the type emanating from the Shuratic Process gain
momentum when they are realized in the midst of interest-free financing using participa-
tory joint-venture financing instruments for sustaining long-term investments. This case
for Saudi Arabia was pointed out in reference to Figure 1. Such an economic diversifica-
tion is caused by increasing interactions among decision-makers, socio-economic vari-
ables, policy instruments, institutional guidance and joint venture projects. They need to
be carried out in the spirit of participation among investors, shareholders and decision-
makers.
We also note that since the propensity to long-term investments reduces risk
through economic diversification, it must also minimize the component of debt instru-
ment that otherwise arise by an increase in loanable funds through the supply of bank
promissory notes. Likewise, the absence of interest-based financing eliminates the rele-
vance of fixed income securities. In the Saudi financial statistics this effect can be seen
from the low value of guaranteed deposits in Table 1.
Thus by removing the financial portfolios from debt instruments and fixed income
securities in commercial banks, the Saudi economy is able to reduce the coterminous un-
certain effects injected by interest rates, speculation and low productivity. A gain on any
of these adverse conditions will enhance the total uncertainty of the speculative portfolio.
For example, interest-based financing generates debt instruments. This in turn impedes
resource mobilization, particularly in long-term investments. Thereby, reduced produc-
tivity and lesser number of projects result. These consequences must be followed by a
further increase in interest rates on savings to enable banks to maintain returns on fixed
income contracts. The ratchet effect of interest rates is thus perpetuated in the portfolio
comprising debt instruments and fixed income securities.
Empirical results on discount rate and cost of capital
A further indication of the low level of risk in long-term investments in Saudi Arabia can
be derived from the estimation of discount rates on net financial assets of commercial
banks. Using Tables 1 and 2, it can be shown that net assets (= total assets – investment)
increased disparately, with rates of growth of 1.61 per cent for 1991-92, 9.68 per cent for
1992-93 and 0.96 per cent for 1993-94. The following then is an inference on discount
rates: A geometric average of these rates is obviously untenable because of the widely di-
vergent rates noted. The discount rates on long-term investments must remain higher than
the growth rates — 0.96 per cent in the low case and 9.68 per cent in the high case.
The analytic explanation behind this kind of discount rate and growth rate relation-
ship was explained in the theoretical part of this paper. Now with the resulting discount
rate estimates for the above two cases of growth rates of bank financial assets, a precise
way of measuring risk and return remains evasive. Besides, the adoption of a discount
rate higher than 9.68 per cent would denote a highly risky portfolio. This we found not to
be a representative case for the bank financial structure in Saudi Arabia. If a discount rate
higher than but close to 0.96 or 1.61 per cent were to be adopted, the portfolio would
show low risk. In such a low risk case there is little reason to discount an income stream.
Discounting as a financial valuation method is thus found to be untenable in the case of
portfolios that are less risky and that depend upon productive returns rather than on inter-
est rates.
The final issue: modernity, Shari’ah and socio-economic change in Saudi Arabia
In the end we return to our earlier concept of modernity in respect to the Shuratic Process
as perpetual change by creative evolution in a process oriented framework of endogenous
learning. This worldview was identified with the Shuratic Process. The question now to
wind up with is this: How will the trend in financial capital market choices being pres-
ently contested between government equities and private bonds evolve in the face of
Saudi Arabia’s fast privatization agenda and her strides towards merging with the
globalization process? There are two ways of addressing this question. On the one hand, a
mix between a will to succumb to the global privatization process, would call for the ac-
ceptance of all kinds of financial instruments in open capital markets most pronouncedly
the interest-bearing ones as fixed income securities. In such a direction of change, abid-
ance by Shari’ah will spell ineffectiveness of one or both of the Saudi social and eco-
nomic goals. The goal of sheer economic efficiency would then be attained by completely
abandoning Shari’ah rules for the economy. This scenario however, is a political impos-
sibility for Saudi Arabia, given her history and constitution embedded in Islam.
The only other way how the efficient and purposive politico-economic goals and
functions of Saudi Arabia can be sustained, is to maintain her Shari’ah conduct of mar-
kets, in which, as the paper has indicated, Saudi Arabia has done well. But even within
this scope, an extensive openness to discourse, vision and change must be invited within
the context of Shari’ah, the expansion of institutional Shuras, their empowerment and
links with national and the global issues in this light. This direction will call for broaden-
ing up the discourse process within her existing model of Shura and the Shuratic Process.
A broad category of participation must be promoted and issues discussed across such de-
centralized participation. This is the kind of medium towards realizing the turn towards a
concept of modernity according to its understanding in the light of the creative evolution
that the Shuratic Process perpetuates.
In a global human process, the epistemology of a new framework of knowledge

needs to be discovered. The praxis of Islamic political economy, centered in its episteme
and ontology of unity of knowledge and driven by the methodology of creative evolution,
can be taken up by the Saudi Government to promote the idea both academically as well
as in practice across the Saudi political economy. Such a vision will mark the principle of
modernity by creative evolution within the dynamics of the Shuratic Process. It is by
moving within and towards such a domain of interactions, integration and creative evolu-
tion qualified by real socio-cultural forces and their meaningful role in society, economy
and institutions, that the future transformation of Saudi Arabia can be envisioned.
Conclusion
In this paper we have introduced the general features of an Islamic political economy as a
study of interactions among social and economic forces having a deep and immutable
epistemology of unity of divine knowledge in it. Islamic Law that springs from this epis-
temology brings about important financial and economic implications for change. The
most important among these are the new instruments that replace interest-based financing
by participatory modes of financing. Such participation must be of a substantive type. It
conveys the knowledge-forming meaning of interactions in the Islamic political economy
both from the point of view of agents and entities in the interacting systems.
We have then investigated the viability of the Islamic politico-economic model by

the example of financial and economic interactions in Saudi Arabia, a country ardently
guided by Islamic Law and the institution of Shura. In this light and in view of the nature
of financial composition of assets of Saudi banks, we have an important lesson to learn
with respect to the organization of the financial portfolio for economic development by
minimizing financial uncertainty. Indeed, insulation of the Saudi economy from the fi-
nancial turmoil of recent years was greatly due to the intrinsic nature of her financial sec-
tor that remains independent of interest-based financing and hence speculative portfolio
investment. The replacement of interest-based financing by and large with equity financ-
ing, as signified by a large share of government bonds (public equities) within the gov-
ernment sector and between government and the private sector both domestically and
with foreign investors, is a logical causality for replacing interest-based financing.
Hence, we noted that both from a theoretical and empirical points of view,
interest-free financing is found to be a logical financial medium that at once also rein-
forces the tenets of Islamic Law on the avoidance of interest rates in the economy. This
aspect of the interrelationship between finance, markets and institutions in Saudi Arabia
forms the rational socio-cultural background of the analysis of this case study of Islamic
political economy.
This same conclusion relating to the irrelevance of interest rate in an economy with
a high propensity for resource mobilization in developmental projects is found to apply
for the Saudi monetary policy (Al-Farsi 1991). Here we find that a combination of an ac-
tive fiscal policy in view of guaranteeing social security and certain subsidies for the
Saudi citizens, with appropriate stabilization policies through financial widening in the
emerging private sector, reduces the price of capital. Now if this process of adjustment is
further supported by risk-diversification and productive resource mobilization, the reduc-

tion in interest rate becomes a logical consequence.
One can explain these effects by the use of the usual kinds of IS-LM analysis
(Choudhury, 1999). Saudi macroeconomic policies are found not to rely on the kinds of
socially disparaging economic restructuring brought about by a regime of tight monetary
policy and fiscal restraint. Instead, lower multiple credit creation is effectively substituted
by a widening of joint venture resources in the emerging Saudi private sector.
In this paper we have found the above fact to be realized by the supply of govern-
ment bonds in equities and joint ventures. Thus once again, the economic efficacy of
Saudi monetary policies is analytically and empirically proven by the social and eco-
nomic relevance of the Islamic legitimacy on equity financing as opposed to interest-
based financing of financial portfolios comprising private bonds, debt instruments and
fixed income securities.
NOTES
1. Let, E(r) denote the expected value of a risky rate of return r with revenue R;
D denote the volume of corporate debt;
C denote the interest on debt;
A denote corporation asset value;
Q = (A – D) denote equity as asset value net of debt.
dE(r)/dD = [(R-C) – (A-D).(dC/dD)]/(A-D)2 > 0, since R> C, dC/dD< 0, A> D.

(¶/¶Q)(dE(r)/dD) = -2(R-C)/Q3 + (dC/dD).(1/Q2)<0.
Furthermore, since dE(r)/d s>0, s being the measure of risk (standard deviation of r),
therefore, (dE(r)/dD) / (ds/dD)> 0, implies that ds/dD> 0. That is risk increases with
debt.
2. Let, g denote the growth rate of dividends for valuation of stockholders’ wealth;
s denote rate of growth in equity earnings;
b denote the earnings pay-out rate.
Hence, (1-b) denotes the retained earnings rate.
g = s(1-b). Consequently, dg/ds = (1-b) – s.(db/ds)> 0.
Since a capitalization rate (rate of interest or cost of capital), we must have, i >g,
for,
PV(X1,X2,…, Xn) = X0 . St=1¥ [(1+g)/(1+i)]t to be a convergent series of
Xt = X0(1+g)t, where Xt denotes dividend flow at time t, t=1,2,..,n.
Therefore, as g increases, i falls and conversely. In such a situation, the corpora-

tion must continuously maintain buoyant interest rates. Thus risk is always a fac-
tor in such enterprises and is linked with interest rate, which in turn is cause
among other factors by the existence of debt.
3. E(Xj) = X(risk-free) + X(risky),
where, X(risky) = [E(Xj) – X(risk-free)].[Cov(Xj,X)/s2(Xj)],
X is the return on the portfolio to which belongs the risky security Xj.
As risk-diversification and product-diversification occurs, Cov(Xj,X)/s2(Xj) tends to a

constant value, say a.
Now, X(risky) = (1 - a ). X(risk-free) +a. E(Xj).

That is, the portfolio risky return is a convex combination of a risk-free return and a risky
return on security belonging to the portfolio.
APPENDIX: SURVEY RESULT ON DESIRED AND EXISTING MODES OF FI-

NANCING VENTURES IN SAUDI ARABIA
The following is an extract from Al-Sakran’s survey results. There were 31 responses to
67 questionnaires (46%):
New sources of fund companies expect to use (if yes):
Issue of common stock 20%
Issue of preferred stock 10%
Retained earnings 20%
Short-term loans 20%

Long-Term loans 20%
Issue debt (corporate bonds) 50%
Reasons for not having corporate bonds in Saudi Arabia
No awareness 19%
Primary market does not exist 29%
Lack of companies’ credit rating 23%
Religious concerns (Islamic) 29%
All of the above 35%
Others 4%
Source: Al-Sakran, S. op cit.
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Culture, Finance and Markets in Saudi Arabia

economy in view of its underlying praxis of interactions among socio-cultural (religious)

The objective of this paper is to investigate such a range of politico-economic di-

Theoretical perspectives of a political economy formed and governed by Islamic

legal injunctions for legislative purposes by Shari’ah is a complex process, embodying in

Instruments of Islamic Law in the political economy

Why abolition of interest according to Islamic Law?

Secondly, in economic terms interest is a payment on idle capital, that is on sav-

The arguments of Islamic political economy on interest rate remain independent of

We thus move on to examine the cultural, financial and economic interactions in an

On the contrary, for a capitalized cash-flow stream to be convergent in the valua-

the possibility of borrowing capital. Such effects result in de-stabilization caused by an

The alternative of equity financing and its effect on economic stability

through institutional discursions and post-evaluation followed by correctives. Economic

economic activities become causally interrelated. Such is a feature of participatory equity

Islamic politico-economic interrelationships among culture, finance and markets in

Empirical inferences derived from the capital structure of commercial banks in

1991 1992 1993 1994 1995

Reserves 10.462 10.461 11.271 11.648 11.180

Foreign assets 118.961 106.372 111.007 97.144 97.970

Bank credita 15.953 24.722 22.602 26.930 n.a.

Investmentsb 24.816 37.916 43.461 50.030 n.a.

Unclassified 14.532 8.561 12.634 13.348 n.a.

Total assets 58,330 275.192 303.715 312.793 307.030

Foreign 27.936 32.509 37.283 39.150 39.680

Capital 18.783 24.457 30.193 33.313 39.250

Unclassified 40.389 40.818 52.890 52.665 31.166

Total liabilities 258.330 275.192 303.715 312.793 307.030

Source: Economist Intelligence Unit, Country Analysis 1999.

Table 2: Financial structure of banks in Saudi Arabia (SR in billions)

1991 1992 1993 1994 1995 1996a 1997a 1998a

(3) Treasury bills3 N.A. 8.7 7.3 4.0

(4) Govt. bonds3 N.A. 56.5 75.9 85.8

Source: Economist Intelligence Unit, Country Report 1999.

Saudi American 16.3 14.2 42.0 41.1

Riyadh 18.4 15.9 54.0 50.4

National Commercial n.a. 38.8 n.a. 76.5

Arab National 10.7 9.6 31.0 32.5

Saudi British 9.7 9.7 27.3 29.9

Saudi Fransi 10.0 8.9 26.2 27.5

United Saudi Commercial 4.1 4.8 11.1 11.2

Saudi Cairo 5.8 4.3 21.1 17.7

Saudi Hollandi 6.9 6.8 14.1 15.7

Saudi Investment 3.3 3.6 7.7 9.4

Bank al-Jazira 1.3 1.1 3.7 4.0

Total 86.5 117.7 268.5 272.6

Resource mobilization, money creation and risk-diversification in Saudi Arabia

A lower rate of growth of credit creation is a sure way of containing interest-based

The effective control of interest-based financing in Saudi Arabia is thereby found

capital, causes long-term investments to be encouraged as opposed to short-run invest-

Here then is an important lesson to learn on risk-diversification of the portfolio by the

Empirical results on discount rate and cost of capital

In a global human process, the epistemology of a new framework of knowledge

We have then investigated the viability of the Islamic politico-economic model by

further supported by risk-diversification and productive resource mobilization, the reduc-

C denote the interest on debt;

A denote corporation asset value;

Q = (A – D) denote equity as asset value net of debt.

dE(r)/dD = [(R-C) – (A-D).(dC/dD)]/(A-D)2 > 0, since R> C, dC/dD< 0, A> D.

(¶/¶Q)(dE(r)/dD) = -2(R-C)/Q3 + (dC/dD).(1/Q2)<0.