Governance of profit and loss sharing financing in achieving socio-economic justice
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 6 August 2021
Issue publication date: 19 August 2021
Abstract
Purpose
This study aims to explore the governance practices of profit and loss sharing (PLS) financing in connection to the socio-economic development objective of the Islamic financial institutions (IFIs).
Design/methodology/approach
The study context included IFIs from Yogyakarta, Indonesia. A two-stage research methodology was used. In the first stage, top ten IFIs – three Islamic commercial banks, three Islamic rural banks and four Islamic micro finance institutions – were considered for in-depth interviews. Formal interview protocol was followed to record and transcribe interviews. In the second stage, a questionnaire survey considered 26 IFIs. Unit of measurement was individuals working at the mid and top level from the selected organisations.
Findings
The governance process of providing and managing PLS financing involves several critical factors, such as the financing duration, instalment timing, contract approval and cost, basis of sharing, risk management, customer empowerment and Sharīʿah compliance. Contrary to the existing belief, the authors found that PLS financing is primarily available for shorter period of time (three years) and it is unavailable for start-ups. Also, newer IFIs rely less on PLS financing than the older IFIs. In addition to worrying about the higher risk of return, IFIs considered government regulation on PLS to be tighter in terms of provision and rescheduling.
Research limitations/implications
This study is limited to investigating IFIs in Yogyakarta, Indonesia. This limitation is covered by taking samples from three types of IFIs.
Practical implications
For IFI practitioners, these findings are expected to improve their confidence in undertaking more progressive efforts in adopting governance policies that contribute to greater socio-economic justice.
Social implications
If the governance good practices are implemented by all IFIs, a higher degree of social welfare and customer awareness can be achieved.
Originality/value
Across all types of IFIs, this study’s results confirm that PLS is less preferred for long-term and start-up financing. These findings should be the ingredients to push research on PLS further, as these findings grossly violate the theory. Fulfilling these gaps could strengthen the nexus between PLS and socio-economic justice.
Keywords
Acknowledgements
Authors are indebted to the Board of Research, Publication and Community Service (LP3M) Universitas Muhammadiyah Yogyakarta, which has provided funding for this research that falls under the Department of Competitive Grant, (Hibah Unggulan Prodi) 2016–2018. As sponsor, the LP3M has no intervention on the design, processes and analysis of this research.
Citation
Yaya, R., Saud, I.M., Hassan, M.K. and Rashid, M. (2021), "Governance of profit and loss sharing financing in achieving socio-economic justice", Journal of Islamic Accounting and Business Research, Vol. 12 No. 6, pp. 814-830. https://doi.org/10.1108/JIABR-11-2017-0161
Publisher
:Emerald Publishing Limited
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