Why Islamic Banks Focus More on Debt-Based Financing Than Equity-Based Which Is More Shariah Compliant?

Abstract

Financing is an integral part of banking system to consolidate operational activities. Small and medium enterprises (SMEs) are one of the backbones for socio-economic development as it require sufficient financial stand in order to implement several business plans. However, Islamic bank plays a prominent role just like its conventional counterpart by providing financing through two modes which are: debt and equity based although the latter seems to be the lesser mode being applied due to several issues in spite being more Shariah compliant. This paper objects to address the issues and challenges behind reluctance of Islamic banks on equity based mode. The paper also provides some suggestions for the promotion of equity based mode for socio-economic development and sustainability.