Profit and Loss Sharing Financing, Mark-Up Products or Conventional Debt ? : Application of Analytic Hierarchy Process

Abstract

Financing SMEs is one of the most critical problems faced by entrepreneurs. PLS (Profit and Loss Sharing) and mark-up instruments are two sets of Islamic modes of financing developed as a substitute for conventional debt, which is typically adopted by SMEs. However, with larger finance offerings, it becomes more complicated for SMEs to determine the best financial instrument. Indeed, the financing decision involves a trade-off between tangible and intangible factors. Therefore, using an experts’ decision-making in evaluating financial products is a beneficial way to assist SMEs choosing the most appropriate one. The purpose of this paper is to apply the Analytic Hierarchy Process (AHP) in selecting an instrument to finance SMEs. Financial suitability, cost, risk, management intervention and profitability are the criteria upon which the financial decision is based in the current study. The results show that PLS equity finance complies with the SMEs profile more than mark-up products and traditional debt. The study has concluded with suggestions for future research.