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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, International Journal of Economics and Financial Issues, vol. 6(4), pages 1407-1412.
    • Handle: RePEc:eco:journ1:2016-04-16
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    References listed on IDEAS

    as
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    3. 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.
    4. Azmat, Saad & Skully, Michael & Brown, Kym, 2015. "Can Islamic banking ever become Islamic?," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 253-272.
    5. 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.
    6. 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.
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    Cited by:

    1. Md Din Islam Miah & Rosalan Ali & Norhanim Mat Sari, 2023. "Challenges and Solutions for Mudarabah as the Prime Investment Tool of Islamic Financing: A Literature Review," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 2168-2185, September.

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    JEL classification:

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

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