The viability of profit and loss sharing based financing for malaysian SMEs

Veelaiporn Promwichit, Shamsher Mohamad, Taufiq Hassan

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Small and Medium Enterprises (SMEs) are vital to the economy. However, they still face financing difficulty in conventional financing due to insufficient collateral. This exploratory study seeks to address this issue by illustrating that pure Profit and Loss Sharing (PLS) that is based on the premise of social justice provides an opportunity to finance SMEs. However, SMEs might be concerned that PLS contracts will reduce their profit since Islamic financial institutions will share the returns based on the profit sharing ratio. This study employs financial data from 30 SMEs in Malaysia to calculate the profit sharing ratio and redistribution of net income between Islamic financial institutions and SMEs. This study then examine SMEs' profit margin ratio from year 2002-2010. The findings show that SMEs have a more stable return per ringgit of sales with lower losses or higher profits through PLS based financing. The results demonstrate that SMEs are not worse-off in PLS based financing and suggest that PLS mode of financing is a viable financing option for SMEs.

Original languageEnglish
Pages (from-to)278-287
Number of pages10
JournalInternational Business Management
Volume7
Issue number4
DOIs
Publication statusPublished - 2013

Fingerprint

Viability
Profit
Financing
Small and medium-sized enterprises
Profit sharing
Islamic financial institutions
Net income
Social justice
Profit margin
Exploratory study
Finance
Malaysia
Redistribution
Financial data

Keywords

  • Access to financing constraint
  • Financial data
  • Islamic financing
  • Profit and loss sharing
  • SMEs

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

Cite this

The viability of profit and loss sharing based financing for malaysian SMEs. / Promwichit, Veelaiporn; Mohamad, Shamsher; Hassan, Taufiq.

In: International Business Management, Vol. 7, No. 4, 2013, p. 278-287.

Research output: Contribution to journalArticle

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