Comparison of Risk and Return between the Time-Value Based Contracts and Economic Value- Added Based Contracts According to Sharp, Jenson and Trinor Measures

Abstract

One of the most important questions in Islamic banking system is about the best method for calculating the interest rate of loans and deposits. This paper compares two methods : time- value method and economic value- added method and tries to answer this question that, based on the information gathered from the financial statements of a sample of the accepted firms in the Iranian exchange market, which method makes more risk-adjusted return. In regard to the fact that the current Islamic banks almost do not use any kind of economic value- added based contracts, we have examined the financial statements of 26 companies in 5 industrial groups to simulate the adjusted return of economic value- added based loans and then compare them with the adjusted return of the time value of money- based loans. We have used the Sharp, Trinor, adjusted Trinor and Jenson indexes for the comparison of the two kinds of loan adjusted returns. We have concluded in the general data analysis and also the classified data analysis that the simulated adjusted returns of the economic value- added based loans were more than the real adjusted return of the time value of money-based contracts. This can create adequate incentives for the Islamic financial system designers to design and implement economic value-added based loans.

Keywords

• banking
• islamic banking
• risk
• return of exchange facilities
• corporate facilities
• value- added
• sharpe
• jensen and treanor criteria