Indexing Government Debt to GDP: A Risk Sharing Mechanism for Government Financing in Muslim Countries

Over the past decades much effort and research has gone into establishing a viable set of Islamic financial institutions. An area of utmost importance, which still has gaping holes, is the development of instruments for government financing on a global level. Most Muslim countries, with the exception of a few Gulf countries, are heavily indebted with high reliance on multilateral financing primarily based on high interest rates. This vicious cycle of interest rates and debt have stunted the growth of these nations and worsened the conditions of the masses. This paper is an attempt at introducing the concept of risk sharing instrumentation in the form of GDP-linked Papers for Muslim governments for their financing through multilateral and supranational bodies. Without dwelling much on the Shariah technicalities, we attempt to discuss the potential benefits of transferring government debt in these forms of risk sharing instruments. The authors have attempted to represent the economic benefits of these risk-sharing mechanisms for a set of four indebted Muslim countries with empirical proof. Through this paper, we endeavour to initiate a thought provoking and practical discussion for further development of these instruments for the betterment of Islamic countries. © Authors