ABSTRACT
The Islamic banking and financial industry has grown exponentially in recent years. The existence of this industry as an alternative industry cannot be denied. As the current global financial and economic crisis has exposed the systemic problems of traditional finance, its proponents have offered an Islamic financial system as a solution. However, Islamic finance has been using traditional financial standards such as the London Interbank Offered Rate (LIBOR) and the Karachi Interbank Offered Rate (KIBOR) in Pakistan, etc. This makes it possible to determine the cost of funds and, therefore, the return on financial investment. This is because Islamic finance, if it is not part of the current conventional finance, has always acted as a financial medium for surplus and deficit units. As an important institution in the Islamic financial industry, Islamic banking has come to an end beyond the role of financial intermediary, as it also acts as a lawyer, supervisor, partner, entrepreneur, and guarantor. However, Islamic finance has not yet introduced an alternative Islamic benchmark to determine the cost of its capital. The need for an alternative benchmark rate for Islamic finance cannot be overstated. This will make it more complete and independent of traditional standards that rely on interest rates, which hate Islamic finance. Therefore, the study aims to develop an Islamic value reference model for the Islamic banking industry, especially for Pakistan, given its importance in the Islamic financial industry. The project has changed the point of view of Islamic benchmarks and also reviewed the traditional price benchmarks used by banks. The chapter also analyzes the theoretical formulation of Islamic benchmarking.
