chapter  8
15 Pages

An overlapping generation valuation model with debt–equity swaps

Prevailing valuation methods in Islamic financing and debt payout by equity and venture capital outlets take recourse to the usual approaches found in the mainstream literature. These comprise discounted present valuation of cash flows (Khan, 1991), expected utility functions in risk and return behavior used for retiring debt (Ebrahim and Bashir, 1999), modeling neoclassical moral hazard behavior in the context of Mudarabah (Khan, 1985) and, occasionally, the game-theoretic method of financial contracting (Bashir, 1990). Upon such behavioral methods the financial picture of the Islamic bank is presented in the form of a principal-agent organization, aiming at the goal of maximizing the economic welfare of clientele by diversifying risk and increasing profit shares through Islamically permissible outlets. The liability side of the balance sheet is shown to be low, while the asset side of the T-account of an Islamic bank is viewed to be investment loaded over time (Dar et al., 2001). It is, thereby, argued that the Islamic bank balance sheets would reflect robust growth of investment through Islamic channels.