Debt financing behaviour of Shariah compliant SMEs (enterprise 50). A dynamic approach on Malaysian Islamic capital market

• Main Author: Haron, Razali
• Format: Conference or Workshop Item
• Language: English; English
• Published: 2015
• Subjects: HG4001 Financial management. Business finance. Corporation finance.
• Online Access: http://irep.iium.edu.my/42769/1/IPAFEM_2015.pdf; http://irep.iium.edu.my/42769/2/SME_Financing_E50_IREP.pdf; http://irep.iium.edu.my/42769/; http://www.ipafem.org/

Employing a dynamic approach, this study investigates the debt financing behaviour of Shariah compliant E50 SMEs in Malaysia covering the existence of target debt, speed of adjustment, factors affecting the adjustment speed and the rational financing behaviour for the period of 2009-2013. This study is motivated by the outstanding growth of Islamic Capital Market (ICM) which has increased by 22.6% to RM1.4 trillion and is expected to reach RM 2.9 trillion by 2020. With the establishment of Shariah Advisory Council (SAC), Securities Commission of Malaysia has set up certain standard of parameters as guidelines in classifying Shariah compliant securities. The central features of the Shariah compliant securities are the prohibition of activities that involve interest (riba), gambling (maisir), uncertainties and speculative trading (gharar). Periodical monitoring is carried out to ensure continuous conformity of those firms to the Shariah principles. Being Shariah compliant, these SMEs offer an interesting platform for further investigation due to the guidelines set by the SAC and their conformity to the Shariah principles. The dynamic model estimated using the Generalized Method of Moment revealed certain determinants significantly influence target debt financing. Noting the positive relationship between tangibility and capital structure yielded in this study enhances Shariah imposition that debt must be asset-backed which means a firm operating under Islamic principles cannot have debt exceeding the tangible assets. What distinguishes Islamic debt from conventional debt is that the former is necessarily asset-backed and hence, the significant amount of total debt would be bounded by the tangible assets owned by the Shariah firms. The study found that 49.25% of the SMEs examined adjust their financing rationally. Out of these firms that behave rationally, the number of firms which are considered as under-levered is equally the same with the over-levered firms. Further investigation revealed that under-levered SMEs adjust relatively faster to be at target debt relative to the under-levered counterparts. SMEs that are practicing rational financing behaviour would either reduce or increase their debt intake to reach to their target debt level. Therefore, this study contributes to the literature and fills the gap by exploring into a relatively new area of debt financing which is the dynamic aspects and will also help to enhance the understanding on debt financing behaviour of Shariah compliant SMEs in Malaysia ICM.