IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2016-04-16.html
   My bibliography  Save this article

Why Do Bank Finance Clients Prefer Mark-up to Profit Loss Sharing Principles? Evidence from Islamic Rural Banks and Small to Medium Enterprises in Indonesia

Author

Listed:
  • Imronudin

    (Universitas Muhammadiyah Surakarta, Indonesia,)

  • Javed Ghulam Hussain

    (Birmingham City University, United Kingdom.)

Abstract

This study examines the preferences of Islamic rural banks clients in choosing Islamic financial contracts to finance their business. Mixed method, combining quantitative and qualitative approaches, was adopted in this study. Quantitative data was gathered from the Indonesian Financial Service Authority to examine the preferences of small to medium enterprises (SMEs) in utilizing types of Islamic financial contracts. Qualitative data was collected by interviewing Islamic Rural Bank (BPRS) managers to investigate the reasons for choices of types of Islamic financing contracts. The finding shows that people prefer to use contracts under mark-up principles rather than profit loss sharing (PLS) principles. Simplicity of the contracts was the main reason for choosing mark-up contracts. This trend affects the growth of mudaraba and musharaka contracts, and ultimately the growth of Islamic banks.

Suggested Citation

  • Imronudin & Javed Ghulam Hussain, 2016. "Why Do Bank Finance Clients Prefer Mark-up to Profit Loss Sharing Principles? Evidence from Islamic Rural Banks and Small to Medium Enterprises in Indonesia," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1407-1412.
    • Handle: RePEc:eco:journ1:2016-04-16
    as

    Download full text from publisher

    File URL: http://www.econjournals.com/index.php/ijefi/article/download/2870/pdf
    Download Restriction: no
    File URL: http://www.econjournals.com/index.php/ijefi/article/view/2870/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beck, Thorsten & Demirguc-Kunt, Asli & Laeven, Luc & Maksimovic, Vojislav, 2006. "The determinants of financing obstacles," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 932-952, October.
    2. Abdul-Rahman, Aisyah & Abdul Latif, Radziah & Muda, Ruhaini & Abdullah, Muhammad Azmi, 2014. "Failure and potential of profit-loss sharing contracts: A perspective of New Institutional, Economic (NIE) Theory," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 136-151.
    3. Jasim Al‐Ajmi & Hameeda Abo Hussain & Nadhem Al‐Saleh, 2009. "Clients of conventional and Islamic banks in Bahrain," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 36(11), pages 1086-1112, September.
    4. Beck, T.H.L., 2007. "Financing constraints of SMEs in developing countries : Evidence, determinants and solutions," Other publications TiSEM 85aac075-08b5-44ce-bf1a-9, Tilburg University, School of Economics and Management.
    5. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
    6. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
    7. Azmat, Saad & Skully, Michael & Brown, Kym, 2015. "Can Islamic banking ever become Islamic?," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 253-272.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ibrahim, Mansor H., 2016. "Business cycle and bank lending procyclicality in a dual banking system," Economic Modelling, Elsevier, vol. 55(C), pages 127-134.
    2. World Bank, 2010. "Scaling-Up SME Access to Financial Services," World Bank Publications - Reports 12515, The World Bank Group.
    3. repec:aly:journl:201711 is not listed on IDEAS
    4. Ibrahim, Mansor H., 2015. "Issues in Islamic banking and finance: Islamic banks, Shari’ah-compliant investment and sukuk," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 185-191.
    5. Esho, Ebes & Verhoef, Grietjie, 2018. "The Funding Gap and the Financing of Small and Medium Businesses: An Integrated Literature Review and an Agenda," MPRA Paper 90153, University Library of Munich, Germany, revised 21 Nov 2018.
    6. Fianto, Bayu Arie & Gan, Christopher & Hu, Baiding & Roudaki, Jamal, 2018. "Equity financing and debt-based financing: Evidence from Islamic microfinance institutions in Indonesia," Pacific-Basin Finance Journal, Elsevier, vol. 52(C), pages 163-172.
    7. Nguyen, Nhung & Luu, Nhung, 2013. "Determinants of Financing Pattern and Access to Formal -Informal Credit: The Case of Small and Medium Sized Enterprises in Viet Nam," MPRA Paper 81868, University Library of Munich, Germany, revised May 2013.
    8. repec:idn:jimfjn:v:4:y:2018:i:1b:p:1-16 is not listed on IDEAS
    9. Knack, Steve & Xu, Lixin Colin, 2017. "Unbundling institutions for external finance: Worldwide firm-level evidence," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 215-232.
    10. Marcela Eslava & Xavier Freixas, 2021. "Public Development Banks and Credit Market Imperfections," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1121-1149, August.
    11. Saibal Ghosh, 2022. "Firm Performance and Productivity: Is Labour an Obstacle?," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 65(3), pages 709-728, September.
    12. W. Raphael Lam & Yan Liu, 2020. "Tackling Small and Medium-Sized Enterprises (SMEs) Financing in China," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 209-239, May.
    13. Mou, W.M. & Wong, W.-K. & McAleer, M.J., 2018. "Financial Credit Risk and Core Enterprise Supply Chains," Econometric Institute Research Papers EI2018-27, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    14. Segarra Blasco, Agustí, 1958- & Teruel, Mercedes, 2010. "Are small firms more sensitive to financial variables?," Working Papers 2072/151623, Universitat Rovira i Virgili, Department of Economics.
    15. Thi Thu Tra Pham & Thai Vu Hong Nguyen & Son Kien Nguyen & Hieu Thi Hoang Nguyen, 2023. "Does planned innovation promote financial access? Evidence from Vietnamese SMEs," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 13(2), pages 281-307, June.
    16. Suhail Ahmad & Tahar Tayachi & Sahibzada Ghiasul Haq & Wangari Wang’ombe & Fawad Ahmad, 2022. "Entrepreneurial-Specific Characteristics and Access to Finance of SMEs in Khyber Pakhtunkhwa, Pakistan," Sustainability, MDPI, vol. 14(16), pages 1-14, August.
    17. Hasan, Syed Akif & Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2012. "Consumer Criteria for the Selection of an Islamic Bank: Evidence from Pakistan," MPRA Paper 40384, University Library of Munich, Germany.
    18. Yot Amornkitvikai & Charles Harvie, 2018. "SOURCES OF FINANCE AND EXPORT PERFORMANCE: EVIDENCE FROM THAI MANUFACTURING SMEs," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 63(01), pages 83-109, March.
    19. Bertrand, Jérémie & Weill, Laurent, 2023. "Too sunny to borrow: Sunshine and borrower discouragement," Research in International Business and Finance, Elsevier, vol. 65(C).
    20. Didier, Tatiana & Schmukler, Sergio L., 2014. "Financial development in Asia : beyond aggregate indicators," Policy Research Working Paper Series 6761, The World Bank.
    21. Thorsten Beck & Asli Demirgüç-Kunt & María Pería, 2011. "Bank Financing for SMEs: Evidence Across Countries and Bank Ownership Types," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 35-54, April.
    22. Bagayev, Igor & Najman, Boris, 2014. "Money to fill the gap? Local financial development and energy intensity in Europe and Central Asia," MPRA Paper 55193, University Library of Munich, Germany.

    More about this item

    Keywords

    Islamic Bank; Small to Medium Enterprises Preferences; Profit and Loss Sharing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2016-04-16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.