On the design and efficiency of a participating growth bill M. Shahid Ebrahim a, *, Abdel-Hameed M. Bashir b a University of Brunei Darussalam, Brunei and National University of Singapore, Singapore b Grambling State University, Louisiana, USA Abstract A Participating Growth Bill (PGB) is an innovative hybrid financial vehicle employed by Western institutions and governments in lieu of short-term debt instruments. This study proposes PGB to be considered as an alternative way of raising funds for open market operations by the governments of Muslim countries constrained by religious regulations against fixed-interest debt (ribawi) financing. The security (PGB) is developed using partial equilibrium analysis under the assumption that the assets backing the financial package do not trade in a secondary market—a situation which invalidates the risk-neutral pricing of the well-known Black and Scholes (1973) model. The study finally demonstrates the efficiency of a PGB over a conventional (ribawi) debt vehicle thereby providing results contrary to assertions of the (i) Capital Structure Irrelevance Theorem (see Modigliani and Miller, 1958) and (ii) Capital Asset Pricing Model (CAPM) (see Sharpe, 1964). © 1999 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: D910 (Intertemporal consumer choice); G240 (Investment banking); H810 (Government loans and credits); P430 (Other economic system: Finance) Keywords: Security design; Islamic banking 1. Introduction The recent innovations in financial engineering in the West have motivated many scholars in emerging Muslim nations to search for alternative and matching instruments that conform with their religious value system. Islam, an Abrahamic religion, encourages free markets, * Corresponding author. Tel.: +1-673-2-249-001 Ext. 133/101/102; fax: +1-673-2-249-003. E-mail address: ebrahims@ubd.edu.bn (M.S. Ebrahim) The Quarterly Review of Economics and Finance 39 (1999) 513–527 1062-9769/99/$ – see front matter © 1999 Board of Trustees of the University of Illinois. All rights reserved. PII: S1062-9769(99)00036-8