Contribution of Islamic Debt Financing in Entrepreneurship Promoting Financial Sector Transformation

Abstract

Empirically conventional financial development theories provided mixed results in motivating entrepreneurship. The risk transferring and fixed returns based lending may harm the new venture if the borrower is not financial literate. In comparison, Islamic finance provides a juristic, participative, and equitable alternative for new ventures, which empirically shows growth promoting effects. This study explores the holistic curvilinear effect of financial development on entrepreneurship while allowing the moderating role of rising Islamic debt financing in the economy. This study selected the unbalanced panel data of all Islamic banks of 16 countries and used panel quantile regression to estimate the quadratic financial development effects and moderation of the Islamic debt financing. The results showed that Islamic debt financing provides entrepreneurship support coverage in countries where the financial sector is not fully developed. Central Banks and Islamic advisory councils can follow the outcomes to integrate increasing Islamic financing in the national financial development policy in developing a facilitative environment for new businesses.