Contribution of Islamic Debt Financing in Entrepreneurship Promoting Financial Sector Transformation

Abstract

Empirically conventional financial development theories provided mixed results in motivating entrepreneurship. The risk transferring and fixed returns based lending may harm the new venture if the borrower is not financial literate. In comparison, Islamic finance provides a juristic, participative, and equitable alternative for new ventures, which empirically shows growth promoting effects. This study explores the holistic curvilinear effect of financial development on entrepreneurship while allowing the moderating role of rising Islamic debt financing in the economy. This study selected the unbalanced panel data of all Islamic banks of 16 countries and used panel quantile regression to estimate the quadratic financial development effects and moderation of the Islamic debt financing. The results showed that Islamic debt financing provides entrepreneurship support coverage in countries where the financial sector is not fully developed. Central Banks and Islamic advisory councils can follow the outcomes to integrate increasing Islamic financing in the national financial development policy in developing a facilitative environment for new businesses.

Investigating the Institutional Quality Integration with Islamic Banking Development in Promoting Entrepreneurship

“…Global Islamic Finance report has identified these 37 countries where formal development of Islamic financing is evident. Hence in expectation, this study has availed Panel Quantile Regression (PQR) which allows for estimating panel data models (fixed effect specification) under data with outliers (Sohail & Arshed, 2022). This model uses the median based slope coefficients which are robust to skewness and outliers in the data (Powell, 2020).…”

“…Saheen et al ( 2022) provided details in terms of possible relationships based on slope values. Further 𝛽 3 and 𝛽 4 explains the change in the quadratic relationship in terms of shifting, flattening/steepening or eventually flipping (Sohail & Arshed, 2022).…”

“…Literature has explored the role of institutions in promoting entrepreneurship and innovation (Sohail & Arshed, 2022;Kalim et al, 2022;Hameed et al, 2022;Arshed et al, 2022). According to these studies, mature institution ease in the business creating and innovation process which increases the demand for / usefulness of venture capital financing which is provided by Islamic banks.…”

Socio-economic causals for entrepreneurial transformation

“…Furthermore, administrative considerations such as cost, time, or other necessary procedures have no bearing on businesses. In such cases, a mature financial system and globalization can play an important role in motivating new businesses (Arshed et al, 2021;Sohail & Arshed, 2022;Ahmad et al, 2022) Moreover, to become an entrepreneur, education creates a positive impact as it increases the capacity of individuals to grab the opportunity (Arshed et al, 2021). Entrepreneurship contributes to a country's economic development as it creates more jobs, reducing poverty.…”

“…While this study controlled for other important factors like institutional quality/governance, economic factors like cost of capital, trade openness (Ahmad et al, 2022) and infrastructure and perceptions like perceived opportunities and culture (Hameed et al, 2022). The factors proposed in the study adhere to the contextual factors discussed by (Aziz, 2019;Sohail & Arshed, 2022). Hameed et al (2022) specifies that the selected control variables are affecting the sensing and seizing dynamic capabilities of individuals towards entrepreneurial transformation.…”