AbstractThis paper argues that utilising risk sharing in preference to interestbased financing would bring a broad range of economic benefits to both individuals and society. The main reason is that equity financing, whether in its conventional or Islamic form, allocates resources more efficiently than loan financing. To show this, the paper compares equity markets with credit markets with a view to efficiency. The prime reason why equity markets allocate resources better than credit markets is that profit as an incentive for driving economic activity is far better suited for allocating resources efficiently than interest. The paper concludes with a number of policy recommendations.
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