ABSTRACT
Although much research has been done in pricing benchmark based on fiqh or Islamic economic principles, up to now there has been no substitution for the concept of interest (rate of interest) when applying Islamic banking principles because many jurists from the middle east even allow the use of a benchmark rate such as London Interbank Offered Rate (LIBOR) as a standard in pricing the assets. In other words, they equate the concept of interest rate with the concept of rate of profit, which is the core reason (raison d’être) for the substitution of the usury as instructed in the Quran. This study aims to review and refine the concept of rate of profit in Islamic banking for the creation of economic justice and stability in Islamic banking industry and capital market. This can be achieved through its role in maintaining the stability of the financial system in which there is an equitable distribution of income and wealth. We can see the connection of rate of profit in creating financial stability, especially in the asset-liability management of financial institutions that generate a stable Net Profit Margin or the rate of profit that is not affected by the ups and downs of the market risk factors including indirect effect on interest rates. Furthermore, Islamic financial stability can be seen from the role of the rate of profit on the stability of the Islamic financial assets that are measured from the Islamic financial asset price volatility in Islamic bond market in capital market.
