Do you have any article to support your claim Prof?

We are working on it. Soon it will be released. Once it is confirmed, I will send you a copy. Thanks. But what is your opinion Mohd?

I believe an entrepreneur prefer Islmaic Banking for one (or more) of the following reasons:

1. Question of relegion (some may prefer the concept of Islamic banking - where there is no interest - on the basis of relegious preferences

2. Predictability (fix installments/repayments, there are no exchange rate risk, interest rate risk...)

3. The project that was financed remains the property of the bank, until the loan is repaid. This decreases the risk for the bank, hence the additional charges are smaller.

I think the profit-loss sharing mechanism of Islamic banking/finance is the reason. Start-up entrepreneurs generally have more risk with their business than an established entrepreneurs. Start-up has the high chance of failure. So, choosing the Islamic financing gives one the comfort that loss will be shared if the business fails.    

Yes, it is true.

Theoretically it is true. But practically it is not true.  This choice will be between equity and debt, not between Islamic and traditional financing.

Islamic finance is available at profit rate and not interest. It is not time based but profit based. Due to lack of predictability and uncertainty over cash flows to service the supplier of capital, based on time (debt interest) would lead to incidents of default. Profit rate finance is like a venture funding and its more suitable for entrepreneurs.  Its a high risk funding and generally lenders are shy in financing the ventures that have high business risk. So availability and business risk drives enter-pruners to prefer Islamic finance. In real estate - property business there are sponsors and profit investors. The investors finding is at profit rate and hence Islamic.

Basically, traditionally, historically and truly (being as an entrepreneur) Islamic finance is just a smart strategy of conventional finance to attract specific markets. I agree with Dr. Jozsef Varga for the reasons.

entrepreneur choose islamic or conventional financing based on his target audience. in both the cases he has to share his profit either in terms of fixed fees or some percentage of profit.  

It depends on what type of entrepreneurs it is and what kind of Islamic banking products offered. 

Micro entrepreneurs or small firms more likely to choose Murabaha instead of Mudharabah or Musyarakah (profit-loss sharing), since they do not need to provide financial statements each month. In PLS, borrowers should provide financial statement monthly as a basis for calculating profit-loss sharing. However with lack of employees and lack of capability to provide reliable financial statement, these entrepreneur tend to choose murabaha, since it is simpler. In addition, since Murabaha offer fixed payment (not floating), these entrepreneurs could manage their cashflow betters.

In term of the entrepreneurs don't want to share the profit, yes it might be true. I did interview to micro loan manager in one Islamic banking in Indonesia and he also raise this issue. 

I did two related research on this issue.  

Article Micro Finance and the Problems on Profit-Loss Sharing in Isl...

Deleted research item The research item mentioned here has been deleted

Ibrahim Fatwa Wijaya has explained it from the Islamic bank perspective only and this can be a very good research topic indeed. But the explanation is somehow in contrast to the traditional (capital structure) theories which you are aiming to test, I think. In order to avoid too much risk or to share risk the better option is to opt for the equity financing rather then debt financing. So, it depends on the type of investment you are planning to make. If u are confident enough that your investment will generate consistent returns and there is less fear of negative returns then the better option is financing through debt.

Brothers and Sisters,

Very strong and healthy discussion. Special Thanks to both I.F.Wijaya and M. Wahab.

Wijaya: From the PLS banking point of view, Musharakah and Mudharabah borrowers are the ones which are expected submit their returns (PLS - monthly statements) rather than Murabaha - as the later is monitored by the bank itself.

When a loan is sanctioned under murabaha - the borrower will enter into an agreement showing the expected profit rate and thereby the bankers are bound to secure their returns. On the other hand, all of the above, the follow up lies with the banker as the core basic of PLS banking requires transparency.

Wahab: You have mentioned about the general tendency of a borrower - from the risk point of view.

Now the question is: in the existence of both type of banking available to a person, which one an entrepreneur prefer?

Anyways thank you dears, for your valuable suggestions.

From the banks perspective PLS is less likely to be prioritized by them unless the problems in PLS are solved. 

1. PLS is little bit contradict with the way of conventional banks operate. It requires entrepreneur skills and capabilities of banks officers. Entrepreneurs like risk however a bank tries to avoid risk/minimize.

2. Lack of human resources in Islamic banking. If banks involve in PLS, banks should act as business partner of the borrowers. Imagine if there are 1000 entrepreneurs choose PLS in a bank branch, how many Islamic bank officers required to run this PLS.

3. In Indonesia, the regulator points out that before Islamic bank and borrowers established a PLS contract, both of them should make projections of future revenue. If the actual revenue is below 80% of the projected revenue, than it can be categories as default. So this mechanism was proposed for protecting the banks. 

4. The customers who save the money in an Islamic bank may not be ready to receive fluctuating sharing from the banks. Therefore IBs tend to choose murabaha as the revenues less fluctuating. 

In my opinion the entrepreneurs tend to choose conventional banking. 

1. It's less complicated procedure in conventional banks. In murabaha financing scheme entrepreneurs need to propose the goods, buy the goods (if wakalah used), take pictures of the goods bought and send to the banks, and submit the invoice. In PLS the process much more complicated.

2. In microfinance, margin/interest proposed by the banks is not the most important matter. The key element is fast process. They come to banks as they see a business opportunity. For example the price of mangos is very low since the supply is abundant (seasonal). Therefore they want to get money as soon as possible. Or they had a big but tight order from their customers. Unfortunately they don't have money to buy raw materials, therefore they go to the banks. 

Very good and in-depth explanation. Appreciated. Esp. I endorse your points no. 1,2 and 3. Among the last 1 & 2, 1 is the undeniable fact and 2 is trivial.

Clear and precise -points to the core. Once again - KUDOS.

Bother Firdouse , in my  article: Traditional Banks Conversion Motivation into Islamic Banks: Evidence from the Middle East> we study the reasons customers (businessman)  prefer Islamic banks from the conventional  bank we fond many reasons one of these the profitability in Islamic banks more and other one beliefs and social legacy.

Would you please have look to this article its interested specially we did same study in Brunei we fond a good percentage of   Islamic bank customers are non Muslim 

Thank you Dr. Farooq. Thanks for the reference. With great pleasure, I will go through that.

The main problem in respect of entrepreneurs is risk management. And the main question is: do Islamic banks provide a low risk offer?

In order to hedge lots of risks I’ve proposed a new model and I’m working on its derivatives. In fact I‘ve solved the problem. You can find the mentioned sollution in my page. I hope to develop my model as strong as western instruments. Islamic finance is always advisabl.

Have you published the research, as being one year old question thus i assume now you must have published it. I would like to see the published paper, kindly share it with me too.