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Does the interest tax shield align with maqasid al Shariah in finance?

Author

Listed:
  • Qamar Uz Zaman
  • M. Kabir Hassan
  • Waheed Akhter
  • Jennifer Brodmann

Abstract

The debt-equity distinction is critical in modern corporate finance. We assess the compliance of the interest tax shield with the maqasid al Shariah in finance. For our analysis, we use the ends of maqasid al Shariah as proposed by Akram Laldin & Furqani, 2013. We develop a survey questionnaire to survey an international sample of well-informed individuals in the field of Islamic economics and finance. We use mean comparison, exploratory factor analysis (EFA), and structured equation modeling (SEM) to evaluate 176 responses. Our results reveal that experts consider the interest tax shield as anathema to the ends of maqasid al Shariah in Islamic finance. We find that the interest tax shield discourages equity financing and hinders the objective of overall human well-being. We recommend reframing the tax shield in favor of equity financing to promote profit and loss sharing.

Suggested Citation

  • Qamar Uz Zaman & M. Kabir Hassan & Waheed Akhter & Jennifer Brodmann, 2019. "Does the interest tax shield align with maqasid al Shariah in finance?," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 19(1), pages 39-48, March.
    • Handle: RePEc:bor:bistre:v:19:y:2019:i:1:p:39-48
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    Cited by:

    1. Uz Zaman, Qamar & Ehsan, Sadaf & Hassan, Mohammad Kabir & Javed, Muzhar & Ul Hassan, Syed Iftikhar, 2022. "Corporate Social Responsibility and Zero Leverage," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 33-46.

    More about this item

    Keywords

    Maqasid al Shariah; Islamic finance; Interest tax shield;
    All these keywords.

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • J88 - Labor and Demographic Economics - - Labor Standards - - - Public Policy
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G01 - Financial Economics - - General - - - Financial Crises

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