IDEAS home Printed from https://ideas.repec.org/a/dug/actaec/y2014i2p61-75.html

PLS Based Financing for SMEs: Returns to IFIs

Author

Listed:
  • Veelaiporn Promwichit

    (University Kebangsaan Malaysia)

  • Shamsher Mohamad

    (Lorong Universiti)

  • Taufiq Hassan

    (University Putra Malaysia)

Abstract

Profit and loss sharing (PLS) based financing without collateral and interest rate could ease the financing difficulty of small and medium enterprises (SMEs). However, this PLS based financing is not widely offered by Islamic financial institutions (IFIs). This exploratory study illustrates that PLS based financing to SMEs is viable for IFIs. Using financial information of SMEs to calculate profit sharing ratio and net income under PLS based financing context, this study determined the profit margin ratio of IFIs from extending PLS based financing to SMEs. The findings show that extending PLS based financing to hypothetical diversified portfolios of SMEs generate higher profit margin compared to conventional lending at low risk based on the Markowitz portfolio theory of diversification. Moreover, as the number of SMEs in the portfolio increases, the risk of insufficient returns from the portfolio when an enterprise suffers a loss reduces.

Suggested Citation

  • Veelaiporn Promwichit & Shamsher Mohamad & Taufiq Hassan, 2014. "PLS Based Financing for SMEs: Returns to IFIs," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 10(2), pages 61-75, April.
    • Handle: RePEc:dug:actaec:y:2014:i:2:p:61-75
    as

    Download full text from publisher

    File URL: http://journals.univ-danubius.ro/index.php/oeconomica/article/view/2230/2084
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Irawan Febianto & Rahmatina A. Kasri, 2007. "Why Do Islamic Banks Tend To Avoid Profit And Loss Sharing Arrangements ?," Working Papers in Business, Management and Finance 200705, Department of Management and Business, Padjadjaran University, revised May 2007.
    2. Beck, Thorsten & Demirguc-Kunt, Asli & Soledad Martinez Peria, Maria, 2008. "Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and Lending Practices," Policy Research Working Paper Series 4785, The World Bank.
    3. Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 93-120, February.
    4. Tariqullah Khan, 1995. "Demand For And Supply Of Mark-Up And Pls Funds In Islamic Banking: Some Alternative Explanations," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 3, pages 1-46.
    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. Muhammad Nouman & Karim Ullah & Saleem Gul, 2018. "Why Islamic Banks Tend to Avoid Participatory Financing? A Demand, Regulation, and Uncertainty Framework," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(1), pages 1-32, March.
    2. Al-Jarhi, Mabid, 2004. "Islamic Finance: An Equitable and Efficient Option," MPRA Paper 55765, University Library of Munich, Germany.
    3. Muhammad Nouman & Karim Ullah, 2014. "Constraints in the Application of Partnerships in Islamic Banks: The Present Contributions and Future Directions," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 6(2), pages 47-62, October.
    4. Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2020. "Islamic banks’ equity financing, Shariah supervisory board, and banking environments," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    5. Tastaftiyan Risfandy & Wahyu Trinarningsih & Harmadi Harmadi & Irwan Trinugroho, 2019. "Islamic Banks’ Market Power, State-Owned Banks, And Ramadan: Evidence From Indonesia," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(02), pages 423-440, March.
    6. Azam Ali & Tanveer Kishwar & Muhamed Zulkhibri, 2018. "Islamic Financial Institutions and Participatory Finance Constraints: The Case of Pakistan," Policy Papers 2018-2, The Islamic Research and Teaching Institute (IRTI).
    7. Ouidad Yousfi & M. Kabir Hassan, 2014. "Moral hazard in Islamic profit–loss sharing contracts and private equity," Chapters, in: M. Kabir Hassan & Mervyn K. Lewis (ed.), Handbook on Islam and Economic Life, chapter 18, pages iii-iii, Edward Elgar Publishing.
    8. Abdel-Hameed M. Bashir, 2003. "Determinants Of Profitability In Islamic Banks: Some Evidence From The Middle East," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 32-57.
    9. Swain, Pankaj & Misra, Arun Kumar & Kumar, Satish & Madhavan, Vinodh, 2026. "Banking on the brink: An incremental cost-based view of financial stress," Research in International Business and Finance, Elsevier, vol. 81(C).
    10. Pejman Abedifar & Shahid M. Ebrahim & Philip Molyneux & Amine Tarazi, 2015. "Islamic Banking And Finance: Recent Empirical Literature And Directions For Future Research," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 637-670, September.
    11. Hameed, Abdullah, 2014. "Exploring the determinants of Pakistani Islamic Bank: Empirical Survey," MPRA Paper 59789, University Library of Munich, Germany, revised 07 Nov 2014.
    12. Hamidi, M. Luthfi & Worthington, Andrew C., 2018. "Islamic Social Banking: The Way Forward," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(1), pages 179-190.
    13. Abdul Karim, Mastura & Hassan, M. Kabir & Hassan, Taufiq & Mohamad, Shamsher, 2014. "Capital adequacy and lending and deposit behaviors of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 58-75.
    14. Olson, Dennis & Zoubi, Taisier A., 2008. "Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region," The International Journal of Accounting, Elsevier, vol. 43(1), pages 45-65, March.
    15. Seda Demiralp & Selva Demiralp, 2014. "The Rational Islamic Actor? Evidence from Islamic Banking," Koç University-TUSIAD Economic Research Forum Working Papers 1425, Koc University-TUSIAD Economic Research Forum.
    16. Hasnie, Syed Sharjeel Ahmad & Collazzo, Pablo & Hassan, M. Kabir, 2022. "Risk assessment of equity-based conventional and islamic stock portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 363-378.
    17. Serhan Cevik & Joshua Charap, 2015. "The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 5(1), pages 111-124.
    18. T.A. Bhavani & N.R. Bhanumurthy, 2014. "Financial Access - Measurement and Determinants: A Case Study of Unorganised Manufacturing Enterprises in India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 49(1), pages 85-108.
    19. Moazzam Farooq & Sweder van Wijnbergen & Sajjad Zaheer, 2015. "Will Islamic Banking make the World less risky? An Empirical Analysis of Capital Structure, Risk Shifting and Financial Stability," Tinbergen Institute Discussion Papers 15-051/VI/DSF92, Tinbergen Institute.
    20. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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:dug:actaec:y:2014:i:2:p:61-75. 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: Daniela Robu (email available below). General contact details of provider: https://edirc.repec.org/data/fedanro.html .

    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.