Debt-based Financing Research Articles

Nonlinear effect of Islamic financing on economic stability: A Case of equity and debt financing

The main purpose of this study is to differentiate between the effects of two major categories of financing of Islamic banks on the economic stability of the selected countries. This study determines the nonlinear effect of equity-based and debt-based financing of Islamic banks to assess how the stability of the economy can be achieved. This study acquires the data on Islamic banking product-wise financing at a national level from the Islamic Financial Service Board (IFSB), and the data on industrial production index is selected from International Financial Statistics for selected countries. The sample size comprises of all the countries included in the IFSB. The data ranges from 2014Q1 to 2019Q4. The economic stability is estimated using the GARCH volatility approach, and the nonlinear ARDL model is used to determine the causal effect of Islamic banking product wise financing. This study clarifies the empirical relationship between Islamic banking equity-based financing and debt-based financing and whether macroeconomic stability is linear or quadratic in terms of the marginal effect of financing, which helps policymakers to constitute strategies for expanding the size of Islamic banking financing. The results identified the inverted U-shaped effect of equity-based financing types on output instability. At the same time, both financing types are not causing price instability. The outcomes are instruments for the central bank to optimize the Islamic banking financing structure to achieve the goal of product-wise financing of economic stability.

MANAGING FINANCING RISK OF ISLAMIC BANKING PRODUCTS IN INDONESIA: A VALUE AT RISK APPROACH

This study aims to assess the potential risk and anticipated returns of equity and debt-based financing products in Islamic banking in Indonesia, represented by the three most prevalent contracts: musharakah, mudharabah, and murabahah. Data was collected from banks' monthly financial reports published on the Indonesia Financial Service Authority (OJK) website from 2014 to 2020, resulting in 82 observations. Data analysis was conducted using the Value at Risk (VaR) method with the variance-covariance approach. Among many methods, VaR is one of the most popular techniques that yields the most comprehensive results in measuring risk and return. The findings reveal that, in general, all equity and debt-based financing yielded stable risk and returns. However, equity-based financing produced higher returns, but also generated higher risks due to its uncertain nature. The results also demonstrate that risk management in Islamic banks improved gradually during the observation period, as indicated by the average score of portfolio combinations. These findings suggest that Islamic banks should balance their product offerings between equity-based financing and debt-based financing while simultaneously strengthening risk management, especially for murabahah products in equity-based financing.

Islamic rural bank mission drift: Equity financing vs debt-based financing

Purpose – This study aims to compare the depth of outreach, financial performance, and trade-off between the depth of outreach and financial performance (mission drift) between equity financing and debt-based financing in Indonesian Islamic Rural Banks.Methodology – We compare the depth of outreach and financial performance using descriptive statistics and explore mission drift comparisons using OLS time series. Findings – The depth of the outreach comparison shows that debt-based financing performs better. However, equity financing outperforms financial performance. The regression results show mission drift in Musharaka and Multiservice financing, indicating that both sides have mission drift. However, there is no mission drift in Murabaha financing, which constitutes the majority of financing in Indonesian Islamic Rural Banks. Murabaha financing synchronously demonstrates excellent depth of outreach and financial performance.Implications – Islamic Rural Banks in Indonesia need product innovation in equity financing to obtain a better depth of outreach and avoid mission drift. The simplicity of the practice in Murabaha can be a reference for product innovation in Islamic Rural Banks, while the government can support Indonesian Islamic Rural Banks' product innovation by providing appropriate regulations.Originality – This study seeks to fill the comparison gap between mission drifts in Indonesian Islamic rural bank financing. There is a limitation in studies of Islamic rural bank financing mission drifts in Indonesia since the comparison of mission drift deals only with Islamic microfinance at a global level.

A Dynamic Model for Analyzing Investment Policies in Iran's Oil Production and Its Scenarios

various related scenarios. The study aims to identify and assess different financial and investment policies that could enhance investment attraction in Iran's oil industry. Methodology: The study employs system dynamics and content analysis to develop the model. The statistical population for the content analysis includes upstream oil industry documents and related articles on investment. In the quantitative section, employees, managers, and experts in the oil industry were selected as the sample population. Data analysis was conducted using Vensim software, and nine different scenarios were developed to evaluate financial and investment policies. Findings: The results revealed that intermediary financing, with an increase of 128.854 units, was identified as the most attractive policy. Debt-based financing, with an increase of 108.333 units, and financing based on underground reserves, with an increase of 69.580 units, followed. These findings highlight the importance of diversifying financial resources and utilizing innovative financial structures in Iran's oil industry. Conclusion: The study concludes that a combination of different financial resources and the application of diversified financial policies can significantly contribute to attracting more investments and reducing financial risks in Iran's oil industry. These findings align with previous studies on financial and investment policies and provide valuable insights for policymakers in Iran's oil sector.

Debt-based financing: a case study of Malaysian Islamic banks

Debt-based financing: a case study of Malaysian Islamic banks

Investigating Equity-Based Financing and Debt-Based Financing in Islamic Banks in Indonesia

Purpose — This study empirically examines whether equity-based financing (EBF) generates fixed income similar to debt-based financing (DBF) in the context of Islamic banks in Indonesia. It also investigates whether the Islamic bank financing return rate (IBFRR) has a relationship with the conventional bank lending interest rate (CBLIR). Design/Methodology/Approach — This paper uses monthly data for the period 2009–2019 and produces 132 units of analysis. The object of the study is Islamic banks (IBs) and conventional banks (CBs) in Indonesia. The study uses the Vector Error Correction Model (VECM) as the tool of analysis. Findings — This study provides evidence that, contrary to DBF products, EBF does not have fixed income. EBF in Indonesian IBs has been executed according to the requirements of Islamic law. The study also finds that CBLIR is not correlated with IBFRR. Originality/Value — This is the first study to correlate equity-based financing return rate (EBFRR) with debt-based financing return rate (DBFRR). This paper also examines the no-causality relationship between CBLIR and IBFRR. Research Limitations — This study uses Islamic banking data in the aggregate. Therefore, it cannot explain whether research results differ between banks. Practical Implications — EBF in Indonesian IBs has been applied according to its epistemology. However, the significant increase in mushārakah financing noted over the study period should be followed by a careful customer business feasibility analysis.

Editorial

Editorial

Risk-Taking in Islamic Debt Financing: Maqasid Perspective

Since the past six decades of its emergence, Islamic banking industry has been widely recognized as an alternative financial system since it could offer similar services like its conventional counterpart. Islamic banking products must be free from Shariah prohibited elements, mainly riba’ which is strongly forbidden. In fact, riba’ is characterised with the risk absence which the risk is fully transferred to one party, resulting this practice is part of exploitation and discrimination. Alternatively, Shariah allows any financial contract as far as it is fair in terms of risk-taking among involved parties. Nevertheless, the current financings offered by Islamic banks particularly debt-based ones are claimed similar to conventional loan. Debt-based financings are systematically organized, by transferring the whole risk to customers in which it should be borne by both parties. However, others said those financings are still exposed to a certain degree of risk. Thus, this paper aims to analyse the issue of risk-taking in debt-based financing from the perspective of M. This subject provides a holistic view on Shariah as well as it plays a significant role in harmonizing between revelation and reality. Based on library research, it is found that there is no strong evidence that debt-based financings should be prohibited because of the issue of risk-taking. Nevertheless, controversial practices that surrounded with those financings should be considered by Islamic finance players. While this study has limitation in terms of the data, it provides a philosophy discussion and deep analysis on the issue.

The Impact Of Financing Product Scheme To Islamic Banking Financial Performance

The aim of this study is to determine how different financing plans affect a bank's ability to earn income and manage financing risk throughout the course of both the short- and long-terms. The study utilizes an associative research design and a quantitative methodology. The Financial Services Authority's monthly aggregate reports on Islamic banking for the years 2012 to 2022 make up the study sample. Total debt-based financing, total profit-sharing financing, total leasing-based financing, return on assets (ROA), and non-performing finance (NPF) are among the variables included in the study model. Vector Error Correction Modelling (VECM), which enables the study of the data, is used to examine the short- and long-term effects of independent factors on the dependent variable. Two investigational models—the ROA model and the NPF model—are included in the study. According to the research's findings, when viewed from the NPF model's point of view, debt- and leasing-based financing are more secure over the long run for Islamic banks. Leasing-based financing, however, turns out to be more beneficial for Islamic banks from the standpoint of the ROA model

Yours, mine, and ours: gender, intra-household dynamics, and financing solar home systems in Tanzania

The financing of off-grid solar is a crucial component for the expansion of electricity access, particularly across sub-Saharan Africa. Emerging literature in energy access research analyzes the role of gender and inequalities in access and subsequent outcomes; however, beyond gendered outcomes, the field has yet to interrogate the intra-household dynamics of obtaining access. The literatures of the intra-household dynamics of budgeting and energy access have remained distinct. Bridging these literatures, we present the first analysis of if and how intra-household dynamics relate to how individuals obtain energy access through our specific case of financing solar home systems (SHSs). Drawing on 113 interviews across four districts in Tanzania, we employ qualitative thematic analysis and quantitative generalized linear model-based prevalence ratio estimates. We find five categories of how SHS adopters describe gender and intra-household dynamics relating to the financing of their SHS. We find it inappropriate to treat the household as a single entity as in half our sample, women are either solely or jointly responsible for financing the SHS. Female headed households have a higher prevalence of relying on debt to finance their SHS, while households with female financial decision-making power have a higher prevalence of relying on savings. The unitary model of a household limits the sector’s ability to efficiently support multi-adult households as they navigate individual needs and preferences in the financing and ultimate acquisition of the SHS. Researchers, policy makers, and the private sector could further acknowledge and explore intra-household dynamics and consider shifting the focus away from debt-based financing towards energy-dedicated savings accounts for female customers and improving borrowing conditions for female headed households.

Are sharia bank financings in Indonesia procyclical?

Purpose – The study aims to determine whether Islamic banks' debt financing and equity financing are procyclical or counter-cyclical.Methodology – The data used in this study cover eight Islamic commercial banks and span from 2008 to 2020, thereby including 72 observations. The analysis employs the dynamic panel data model estimated using the GMM method (Generalized Method of Moments).Findings –The debt-based financing, under murabahah, salam, istishna, and ijarah contracts, did not display clear procyclical or counter-cyclical behavior. In contrast, equity financing based on mudharabah and musyarakah contracts demonstrated procyclical characteristics concerning economic fluctuation.Implications – Policymakers need to pay more attention to Islamic banks with a greater proportion of equity financing for both micro and macroprudential policy purposes since procyclicality is likely to be associated with higher risks. Similarly, Islamic banks with greater proportion of equity financing need to watch carefully the behavior of their equity financing concerning its effect on risks for the purpose of their risk management and prudential policy. Originality – This research paper fills in the absence of studies that examine which category of Islamic bank financing – debt-based or equity-based financing - is more procyclical.

FINANCIAL SUSTAINABILITY OF A FIRM: DEBT-BASED OR EQUITY-BASED FINANCING TO PURSUE?

This study examines the potential of utilizing equity-based financing by companies in achieving financial sustainability as compared to debt-based financing. To this end, a conceptual framework of equity-based financing over debt-based financing is developed to provide an understanding of the concept of equity-based financing. Subsequently, this study analyses the credit risk exposure between equity and debt for selected sectors in Malaysia. More specifically, a Monte Carlo method is employed to examine the feasibility of the equity-based financing model in fostering the financial sustainability of companies through simulation of equity-based and debt-based financing models from the global financial crisis (GFC) period to the Covid-19 phase. This study finds that equity-based financing can reduce credit risk exposure when returns are tied to the company’s performance. The findings also show that equity-based financing can achieve financial sustainability regardless of any economic events. To conclude, equity-based financing can thus be a viable capital financing option for companies because it can contribute to long-term financial sustainability.

Efforts to Increase the Growth of Islamic Bank Financing by Diversifying the Right Financing Types

Purpose: This study aims to find an effective formula in encouraging the growth of the three types of financing, equity-based financing, debt-based financing and lease-based financing. Theoritical Framework: Some factors originating from both internal and external bank may affect bank in channeling its financing. The development of total Islamic bank financing is affected by microeconomic and macroeconomic factors. Several microeconomic factors, including non-performing financing (Nastiti & Kasri, 2019), profitability (Murni et al., 2018; Nastiti & Kasri, 2019), third party funds (Annisa & Yaya, 2015; Arnan & Kurniawasih, 2014; Destiana, 2016; Furqaini & Yaya, 2016; Giannini, 2013; Ispad, 2019; Jamilah, 2016; Priyanto et al., 2016) and equivalent rate (Kiswanto, 2013; Kurniawanti & Zulfikar, 2014; Pramono, 2013; Riyanto, 2016). While macroeconomic factors are economic growth (Anwar et al., 2020; Ayyubi et al., 2017; Hafizh et al., 2020), inflation (Mubarok et al., 2020; Nastiti & Kasri, 2019), interest rates (Hafizh et al., 2020; Mubarok et al., 2020). Design/Methodology/Approach: This study employed a quantitative approach with data analysis methods error correction model and co-integration. The secondary data selected as the sample range from quarter four (2014) to quarter first (2022). Findings: Overall the growth in Islamic bank financing is influenced by macroeconomic and microeconomic variables. From a macroeconomic perspective, equity-based financing is more influenced by economic growth than interest rates and inflation. Meanwhile, debt-based financing and lease-based financing are more influenced by interest rates than economic growth. From a microeconomic perspective, the growth of third-party funds always affects the three types of financing, while non-performing financing and the level of profit sharing only affect equity-based financing. Research, Practical & Social Implications: It is recommended that Islamic banks focus more on collecting third party funds in order to encourage financing growth. Suggestions for further research are that the time period is made in years and use a more comprehensive analysis method to see the two-way interaction between the existing research variables. Originality/Value: Economic growth and interest rates can be used as macroeconomic indicators in controlling the growth of the three types of Islamic bank financing. The high interest rate will encourage the growth of equity-based financing, but on the other hand it will slow down the amount of debt-based financing. Meanwhile, microeconomic indicators such as the growth of third party funds are the determinants in encouraging the growth of the three types of financing, in addition to non-performing financing and the equivalent rate.

Analysis of IMBT Financing for the Purchase of Fixed Assets in PT Wijaya Karya Beton Tbk

PT Wijaya Karya Beton Tbk (Wika Beton) has a vision of "Becoming a Leading Company in the Field of Engineering, Production, Installation (EPI) of the Concrete Industry in Southeast Asia". To support this vision, Wika Beton prepared the Company's Long-Term Plan for 2023-2027. In the long-term plan, investment programs and company capital expenditure plans aim to support business development and company profit growth. Wika Beton has three debt-based financing alternatives that can finance capital expenditure plans: investment loans, bonds and ijarah muntahiya bi tamlik (IMBT). This research uses a case study method combined with a quantitative method in the form of a scenario analysis by comparing the impact of several financing alternatives (investment loans, bonds, and IMBT) on the company's financial projections for 2023-2027. The purpose of this study is to evaluate various debt-based financing alternatives that companies can use to fund the purchase of the company's new fixed assets in the long-term plan 2023-2027. As a result of this study, IMBT is the most efficient financing and the most positive impact on the company's current ratio and debt-to-equity ratio.

Debt-Based Financing: A Case Study of Malaysian Islamic Banks

Debt-Based Financing: A Case Study of Malaysian Islamic Banks

Studi Literatur Skema Pembiayaan Lembaga Keuangan Mikro Syariah


 Financing schemes carried out by Islamic microfinance institutions continue to face challenges with the development of these institutions. A unique financing scheme with a prohibition on interest-based financing. The literature study used in this study used data in the form of Scopus indexed articles. Data containing content related to financing schemes for Islamic financial institutions was selected with a total of 18 articles. Furthermore, the stages of research are carried out as described in the research methodology. The findings of this study describe two main financing schemes carried out by Islamic financial institutions, namely: The first scheme is Profit and Loss Sharing (PLS) with mudharabah, musyarakah, muzara'ah and muzaqat contracts. The second scheme is non-PLS, which includes murabahah, bai' salam, ijarah and qard al-hasanah. Other findings in this study describe Islamic MFI financing schemes in several countries such as: in Indonesia there are two financing principles in Islamic MFIs, namely equity financing using PLS mechanisms such as: mudharabah and musyarakah. The second principle is debt-based financing using a non-PLS mechanism. While in Bangladesh the Grameen Bank model was developed, but it is considered not to meet Islamic sharia because it still uses interest. Furthermore Kalanjiam financing scheme in India which is quite successful. Finally, in Latin America and Africa, the village bank model has been successfully implemented in accordance with sharia in Jabal al Hoss, Syria.
 Keywords: LKMS, Financing, Literature Study

Introducing an Islamic equity-based microfinance models for MSMEs in the State of Libya

PurposeThis study aims to propose and verify the suitability and applicability of Islamic equity-based microfinance models for financing micro, small and medium enterprises (MSMEs) in the State of Libya. The proposed models combine the unique features of social solidarity, cooperation “Ta’awan,” meeting religious requirements and providing financing more fairly and equitably.Design/methodology/approachA qualitative approach is applied in this study through semi-structured interviews with several Libyan experts, including Islamic bankers, Shariah scholars, MSMEs experts, Islamic microfinance experts and academicians. The data collected from 2019 to 2021 and thematic analysis by computer-based software NVivo is used to analyze the data.FindingsThe results indicate that the proposed Islamic equity-based microfinance models are suitable and applicable in Libya. This study also reveals that the proposed models have numerous potential benefits not only in meeting the financial needs of MSMEs but also in meeting the government objectives in economic divarication and socioeconomic development.Research limitations/implicationsFirst, the study proposes the applicability and suitability of Islamic equity-based models in financing MSMEs only, while large firms are excluded from the study. Second, the study only proposes and tests the applicability of Islamic equity-modes of financing contracts, namely, Musharakah and Mudarabah, while Islamic debt-based financing models are not included. Finally, as there is no practical evidence of using those models for financing MSMEs in Libya, this study lacks empirical evaluations of equity models’ real benefits on income, employment generation, living standards improvement and business growth and sustainability.Practical implicationsGiven the importance of the MSMEs sector for the State of Libya’s economic growth, it is expected that the findings of this study can be of assistance in formulating guidelines and implementing Islamic equity-based microfinance programs. Besides, it can be a valuable source of information for policymakers for improving the functions of the current microfinance programs in the country. Additionally, as studies concerning Islamic alternative models for financing MSMEs are scarce, the current study can also be a reference point for researchers, academicians, practitioners and other stakeholders.Social implicationsProviding capital support for the underfunded economy segment, attracting small savings, increasing investments and developing entrepreneurial skills could lead to improved economic productivity and growth.Originality/valueThe present study proposes the structure of Islamic equity-based microfinance models for MSMEs in Libya and verifies the suitability of those proposed models among Libyan experts. To the best of the authors’ knowledge, no study has been conducted on uncovering and exploring the potentials of Islamic equity-based microfinance models for financing MSMEs in Libya.

The Role of Islamic Microfinance in Uplifting B20 Communities in Malaysia in The Covid-19 Pandemic

The purpose of this study is to review the Islamic microfinance model that best suited the bottom of the wealth pyramid (B20) communities in Malaysia. Islamic microfinance products and services that are friendly to the B20 communities are crucial to ensure they are not lacking behind from the current development where everybody has access to the financial services. Most current Islamic microfinance products use debt-based financing that similar to the banking products. These products are not suitable to the B20 communities because it creates debt and burdens them to pay back the financing. Therefore, this paper reviews the potential of equity-based financing models that suit to the B20 communities. The study reviews past literature obtained from scholarly databases including Web of Sciences, Scopus, and Google Scholar. In addition, data from microfinance providers are also collected through their website, news published, and bulletin. The findings reveal that equity-based financing via musharakah mutanaqisah seeing as the innovative Islamic microfinance model that suit to the B20 communities compares to debt-based financing.

Impact of COVID-19 on the Performance and Stability of Conventional and Islamic Banks in the GCC Region, Malaysia, and Pakistan

This study examines the impact of COVID-19 on the performance and stability of conventional and Islamic banks. The sample included all the 21 listed Islamic banks (IBs) and 44 listed conventional banks (CBs) from the GCC region, Malaysia, and Pakistan. Quarterly data of these banks covering the period January 2019 to June 2020 were obtained from their quarterly reports. Performance was measured by return on assets (ROA) and return on equity (ROE), while stability was measured by the Z-scores of these banks. Based on the previous literature, a better performance of IBs was expected because these banks are based on the participatory mode of financing instead of debt-based financing. However, the results of the current study showed a significant and negative impact of COVID-19 on the financial performance of both types of banks, suggesting that either type of banking was significantly affected during the pandemic. However, we did not find any significant evidence of the impact of COVID-19 on the stability of these banks.

Impact of COVID-19 on the Performance and Stability of Conventional and Islamic Banks in the GCC Region, Malaysia, and Pakistan

This study examines the impact of COVID-19 on the performance and stability of conventional and Islamic banks. The sample included all the 21 listed Islamic banks (IBs) and 44 listed conventional banks (CBs) from the GCC region, Malaysia, and Pakistan. Quarterly data of these banks covering the period January 2019 to June 2020 were obtained from their quarterly reports. Performance was measured by return on assets (ROA) and return on equity (ROE), while stability was measured by the Z-scores of these banks. Based on the previous literature, a better performance of IBs was expected because these banks are based on the participatory mode of financing instead of debt-based financing. However, the results of the current study showed a significant and negative impact of COVID-19 on the financial performance of both types of banks, suggesting that either type of banking was significantly affected during the pandemic. However, we did not find any significant evidence of the impact of COVID-19 on the stability of these banks.