An innovative model for financing public infrastructure investments: GDP-linked sukuk

Global economic and financial crises have been occurring periodically and it causes criticisms against the current financial system. Almost all crises have been related to high level of indebtedness of economic agents. Interest (Usury) has been acknowledged as the root cause of debt crises. The usury-based economic system has been leading the global economy to recurring financial crises. Islam prohibits all kinds of usury and keeps this prohibition up till today in theory. Islamic economics and finance has been targeting interest-free economic system. The goal of this thesis is to remove usury-based public borrowing. To achieve this goal, a new and innovative Sukuk design which is based on Istisna and Forward Ijara contracts with GDP-linked periodic payments has been proposed in the thesis. The proposed model aims to finance public infrastructure investments. It is stated that the proposed model would act like an automatic stabilizer on public debt to GDP ratio. In addition, the criticisms about using conventional interest rates for pricing Islamic financial instruments would be faded away by the help of this method. The legal framework which enables Ministry of Treasury and Finance in Turkey to issue sovereign Sukuk has been reviewed and it is concluded that there is no need for amendment in the current legal framework to issue the proposed Sukuk certificates in this thesis. Issuance of a benchmark size GDP-linked Sukuk as proposed could locate Turkey as a pioneer in Islamic financial markets. Moreover, it is considered that the proposed model would help to diversify borrowing instruments and broaden the investor base.