Research Output

Islamic corporate financing: does it promote profit and loss sharing?: Islamic corporate financing: does it promote profit and loss sharing?

  Islamic financing instruments can be categorised into profit and loss/risk sharing and non-participatory instruments. Although profit and loss sharing instruments such as musharakah are widely accepted as the ideal form of Islamic financing, prior studies suggest that alternative instruments such as murabahah are preferred by Islamic banks. Nevertheless, prior studies did not explore factors that influence the use of Islamic financing among non-financial firms. Our study fills this gap and contributes new knowledge in several ways. First, we find no evidence of widespread use of Islamic financing instruments across non-financial firms. This is because the instruments are mostly used by less profitable firms with higher leverage (i.e., risky firms). Second, we find that profit and loss sharing instruments are hardly used, whilst the use of murabahah is dominant. Consistent with the prediction of moral-hazard-risk avoidance theory, further analysis suggests that users with a lower asset base (to serve as collateral) are associated with murabahah financing. Third, we present a critical discourse on the contentious nature of murabahah as practised. The economic significance and ethical issues associated with murabahah as practised should trigger serious efforts to steer Islamic corporate financing towards risk-sharing more than the controversial rent-seeking practice.

  • Type:

    Article

  • Date:

    23 May 2016

  • Publication Status:

    Published

  • Publisher

    Wiley

  • DOI:

    10.1111/beer.12120

  • ISSN:

    0962-8770

  • Library of Congress:

    HJ Public Finance

  • Dewey Decimal Classification:

    337 International economics

  • Funders:

    Laureate Online Education - The University of Liverpool

Citation

Minhat, M., & Dzolkarnaini, N. (2016). Islamic corporate financing: does it promote profit and loss sharing?: Islamic corporate financing: does it promote profit and loss sharing?. Business Ethics: A European Review, 25(4), 482-497. https://doi.org/10.1111/beer.12120

Authors

Keywords

Islamic finance; corporate financing; musharakah; murabahah; profit and loss; risk sharing;

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    This is the peer reviewed version of the following article: Minhat, M. and Dzolkarnaini, N. (2016), Islamic corporate financing: does it promote profit and loss sharing?. Business Ethics: A European Review, 25: 482–497. doi:10.1111/beer.12120, which has been published in final form at http://dx.doi.org/10.1111/beer.12120. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

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