International Business Management

Year: 2013
Volume: 7
Issue: 4
Page No. 278 - 287

The Viability of Profit and Loss Sharing Based Financing for Malaysian SMEs

Authors : Veelaiporn Promwichit, Shamsher Mohamad and Taufiq Hassan

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.

How to cite this article:

Veelaiporn Promwichit, Shamsher Mohamad and Taufiq Hassan, 2013. The Viability of Profit and Loss Sharing Based Financing for Malaysian SMEs. International Business Management, 7: 278-287.

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