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Bank Financing and Firm Growth: The Role of Islamic Bank Financing

Article in International Journal of Economics and Financial Issues · July 2019

DOI: 10.32479/ijefi.8278

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 International Journal of Economics and Financial
Issues
ISSN: 2146-4138

available at http: www.econjournals.com

International Journal of Economics and Financial Issues, 2019, 9(4), 181-188.

Bank Financing and Firm Growth: The Role of Islamic Bank

Financing

Mahmoud Al-Rdaydeh1*, Joriah Muhammad2, Haslindar Ibrahim2

Department of Business Administration, Ibn Rushd College for Management Sciences, Abha, Saudi Arabia, 2School of
1

Management, Universiti Sains Malaysia, Penang, Malaysia. *Email: [email protected]

Received: 23 May 2019 Accepted: 14 July 2019 DOI: https://doi.org/10.32479/ijefi.8278

ABSTRACT
The study examined the influence of Islamic and/or conventional bank financing on the growth of firms. The data were based on 113 firms in a Middle
East country – Jordan – that implemented a dual-banking system from 2007 to 2016. The finding revealed that the implementation of either type of
bank financing, be it Islamic and/or conventional, affect the growth of the firms. The study observed that Islamic bank financing had a more significant
effect on the growth of the firms. Following the results of this study, stakeholders, managers, and investors are expected to change their views on
Islamic bank financing, which is currently viewed as a part of religious practice. It may lead to the utilization of Islamic bank financing by firms. It
should be noted that this study is one of the first empirical studies on the impact of Islamic bank financing on the growth of firms.
Keywords: Interest-free Credit Facility, Islamic Finance, Conventional Loan, Firm Growth, Panel Data
JEL Classifications: G30, G32, C23

1. INTRODUCTION and Sunna (Algaoud and Lewis, 2001). With regard to all financial
activities of Islamic institutions, this principle strictly prohibits the
Bank financing is one of the important sources of external funding receipt or payment of interest, known as Riba (Zaher and Kabir
for firms (Ayyagari and Maksimovic, 2007; Klapper et al., 2006; Hassan, 2001). Apart from that, all contracts must be fair with no
Levine and Warusawitharana, 2014), and it is also the strongest exploitation, and contracts involving risky or speculative ventures
external determinant of the growth of firms. This may be due to for profit are prohibited (Siddiqi, 2002). All parties involved in a
the absence of adequate internal funding. Some of the benefits of contract share profit or loss without any pre-set return. This is in
bank financing for firms are adverse selection costs, low moral contrast to the conventional model, which is typically debt-based
hazard, and the availability of renegotiation in cases of financial and therefore is high in risk (Imam and Kpodar, 2010). Therefore,
distress (Chemmanur and Fulghieri, 1994; Hoshi et al., 1993). In the key differences between Islamic and conventional bank
this regard, bank financing may contribute to the growth of a firm, financing are the sharing of profit and loss, and the prohibition
provided that it allows the firm to address the liquidity constraint of interests.
and raise the profits.
Despite the unique characteristics of Islamic bank financing, its
The emergence of Islamic finance in the last four decades allows impact on the growth of firms remains relatively unknown. There
firms to acquire bank financing from different types of commercial are some studies that have examined this issue. For instance,
banks (Islamic and non-Islamic banks). The key difference Shabani et al. (2014) analyse the impact of Islamic loan on the
between the products and services of these banks is that Islamic investment growth of private-sector in Iran. Meanwhile, an earlier
banking is based on the Sharia principles derived from the Qur’an study by Weill and Godlewski (2012) focused on the benefits

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International Journal of Economics and Financial Issues | Vol 9 • Issue 4 • 2019 181
 Al-Rdaydeh, et al.: Bank Financing and Firm Growth: The Role of Islamic Bank Financing

for good-sized firms in choosing Islamic bank loan rather than a a customer and then selling it to him (Hanif, 2010). One of the
conventional bank loan. Some literature presented comprehensive two most important components of Islamic financing is known as
studies of how the growth of a firm is impacted by conventional “sharing” (Musharaka and Mudaraba) and is built on Profit and
finance (Ayyagari and Maksimovic, 2007; Brown et al., 2011; Loss Sharing (PLS) standards. Algaoud and Lewis (2001), and
Klapper et al., 2006; Rahaman, 2011; Volk and Trefalt, 2014), Saeed (2001), explained that these methods of financing have
albeit contributing little to the knowledge of bank financing in no pre-set or agreed profit. Any loss hazard is distributed among
Jordan or similar emergent states, since the majority of studies investors and backers according to their respective shares. The
have been focused on developed Western countries. other component is known as sale financing (Murabaha, Bay’
As-salam, and Tawarruq) whereby a wide range of goods can be
Following the previous discussion, this study investigated the purchased by the bank and resold to customers at an agreed, higher
impact of Islamic and conventional bank financing on the growth price. Another type of financing mode is called leasing mode,
of firms in Jordan, a developing country. The results of the study which depends on the Ijara financing principle (Saeed, 2001).
demonstrated that Islamic bank financing has a positive impact
on the growth of firms in relation to both assets and employment. Notwithstanding, the importance of the relationship between
This observation was also reflected in firms that employed both bank financing and firm growth has been empirically illustrated
(combined) Islamic and conventional bank financing. in many literatures. For example, Rahaman (2011) revealed
that a firm is reliant on bank financing as its principal backing
in achieving growth. Increased access to bank financing may
2. LITERATURE REVIEW AND
decrease the impact of internal financing on firm growth. A recent
HYPOTHESES DEVELOPMENT study by Ullah and Wei (2017) involving 30 East European
and Central Asian countries indicated that the development in
Apart from internal sources, bank financing is one of the central sales, employment, workforce output, and efficiency improved
components that have a significant impact on the growth of a significantly and swiftly in firms that utilized bank financing.
firm. Ayyagari et al. (2012) observed that the most extensive and These findings were supported by Brown et al. (2011) in a study
significant external funding was bank financing. Nevertheless, involving 20 European countries. Their study demonstrated that
it should be noted that its impact on the growth of a firm may bank financing for firm growth was required in 70% of Eastern
differ across firms according to the way the funds are utilized. European countries. Apart from that, Al-Rdaydeh et al. (2019)
For instance, if bank financing is used to ease a liquidity problem, study involving 87 Jordanian firms indicated that assets and
the firm may likely to grow. This may lead to higher profits and employment growth were positively related to bank financing. Volk
eventually, a growing economy. Furthermore, many studies and Trefalt (2014) stressed that a firm’s ability to grow require
have illustrated that the advantages of bank financing such as bank financing. From this, the firm will become less reliant on
legality, transparency, and problem-free arbitration in cases of alternative funding sources and will achieve higher growth rates in
renegotiation (Berlin and Loeys, 1988; Chemmanur and Fulghieri, a shorter time. In addition, Claessens and Laeven (2003), Ayyagari
1994; Diamond, 1991; Hoshi et al., 1993). Although there are et al. (2011) and Klapper et al. (2006), reiterated the importance
a number of issues in capital market dealings, the easy access and constructive influence of bank financing on the growth and
to bank financing through well-organized fiscal establishments innovation of firms.
enables the growth of firms.
Interestingly, there are studies which observe this topic from
The last four decades witnessed the emergence of Islamic finance a different perspective – investigating the influence of flaws
that allowed firms to acquire bank financing from different types of in the money market on the investment environment (Ağca
commercial banks (Islamic and conventional banks). Nowadays, and Mozumdar, 2008; Carpenter and Petersen, 2002; Fazzari
banks from all around the world typically practice a dual banking et al., 1988; Hubbard, 1998; Ndikumana, 1999). This perception
system (Islamic and conventional). Such system has no operational may increase the importance of bank financing, strengthening
problems as the only difference between the systems is Islamic the relationship between bank finance access and firm growth.
banking operates within the regulations and parameters of Shariah Drawing from previous studies, the influence of bank financing on
law. The viewpoints and attitudes of the two systems are different, firm growth is significant. This is in line with the primary role of
particularly in agreement financing. Conventional banks finance bank financing; it supports firms’ growth and ultimately facilitates
fixed-return loans, a service which is unavailable in Islamic banks economic development. It is therefore pertinent to recognize the
due to the prohibition of interest charges (Riba). Although Islamic significant role of the conventional banking sector as an important
banking offers profit on investment, interest on loans is forbidden partner in economic development.
(Hassan and Lewis, 2007; Sundararajan and Errico, 2002).
Interest is also commonly referred to as “riba,” and is defined Whereas there is no shortage of research and literature on the
by Aggarwal and Yousef (2000, p. 96), as “any predetermined or conventional banking sector and the growth of firms, the opposite
fixed return in financial transactions.” In contrast, conventional is true of Islamic banking. Although the latter is becoming
banks offer long and short-term loans, as well as overdrafts, increasingly important internationally, it is still a relatively new
whereas Islamic banks can offer only “Qard Hasn,” also known concept in the banking industry. This has generated a few research
as loans without interest. Moreover, Islamic banks are capable in its relation to firm growth. An example of a study would be of
of providing financial assistant by buying the asset required by Shabani et al. (2014) who observed Islamic bank financing in firms

182 International Journal of Economics and Financial Issues | Vol 9 • Issue 4 • 2019
 Al-Rdaydeh, et al.: Bank Financing and Firm Growth: The Role of Islamic Bank Financing

and its impact on the investment growth in Iran’s private business 3. METHODOLOGY
community. The findings demonstrated a positive impact of Islamic
bank financing on investment development, with a particular focus 3.1. Sample and Data Collection
on imported goods within private sector investment. Nonetheless, This study assessed the link between bank financing and the growth
it should be noted that Iran had no alternative banking system, of Jordanian firms. The companies involved in this study were
which precludes any comparative research. This made the results part of the Amman Stock Exchange (ASE) list, one of the largest
unclear as to whether the growth was due to Islamic bank financing, stock exchange in the Middle East. It should be noted that Jordan
or whether the results can be extrapolated to cover all firms. The is the center in the Middle East because it has the best strategic
need for research on Islamic bank financing and firm growth is location for a market of more than 1 billion consumers. Over the
imperative for the following reasons: past few years, there have been several issues that had a negative
1. The global financial crisis of 2007-2008 was not unique; impact on the Jordanian non-financial sectors (Al-Rdaydeh et al.,
there are more recent and detrimental cases that threaten 2018; Alabdullah et al., 2014).
the conventional banking system. The emergence and
development of international Islamic banking can be seen as This study included non-financial sector (service and industrial
an alternative financial structure. sectors) for listed Jordanian companies. The firms’ annual reports
2. Islamic banking has many benefits that attract prospective from 2007 to 2016 were reviewed and the firms that implemented
borrowers, especially firms in countries with a dual banking conventional or Islamic bank financing were selected. Note that
system. This is because Islamic bank financing relieves them of in accordance with corporate governance regulations, all of the
ethical and moral dilemmas such as ethical risk and the need to firms disclosed the source of their borrowed money. The time
make disagreeable choices. According to Goaied and Sassi (2010), period chosen for this research was related to several issues that
only a few prospective borrowers are sufficiently well-informed to negatively impacted the firms’ performance and the economy of
make decisions. Such situation may expose them to moral risk or Jordan (e.g., the Arab Spring, the shortages in gas movements from
disagreeable choices when dealing with the borrowing procedures Egypt, and the civil war in Syria). Combined with the increase
of conventional bank financing. On the other hand, the Islamic in oil process, these issues further affected the performance and
banking system relieves the customer of such worries by offering growth of listed firms and the country’s economy (CBJ, 2013).
not only financing but also equity. Furthermore, the banks could
also guide and encourage the firm’s policies towards, for example, As mentioned earlier, the ASE data stream and the annual reports
cost reduction, increasing the firm’s competitiveness. of 223 Jordanian firms listed on ASE by the end of 2016 were
3. Conventional bank financing is implemented at a fixed rate, analyzed in this study. Nonetheless, the companies using the
but no interest charge (Riba) is allowed in Islamic banking, primary standard industrial classification code relative to the
a positive encouragement for the firm’s growth. Awareness banking industry (Chui et al., 2002; Omet and Mashharawe, 2002;
of the positive advantages of such bank financing systems Schmukler and Vesperoni, 2006), and firms with incomplete data
can encourage not only the management of firms, but also are excluded. The final sample size was 113 firms.
the government advisors to study these financing models as
worthwhile options for conventional banks. 3.2. Measurement of Variables
Two dummy variables were used to measure the independent
These aspects motivate the proposal of the following hypotheses variable. The first variable had a value of “1” if the firm used
in this study: Islamic bank financing and a value of “0” otherwise, while the
H1: There is a positive relationship between the implementation of second variable had a value “1” if the firm uses Islamic and
Islamic bank financing and asset growth in Jordanian firms. conventional bank financing simultaneously and a value of “0”
H2: There is a positive relationship between the implementation of otherwise. Furthermore, the dependent variable was the growth
Islamic bank financing and employment growth in Jordanian of Jordanian firms and was measured according to increased
firms. sales, employment of additional staff, the value of shares, and
total firm assets. In line with previous studies by Sleuwaegen
Based on the previous discussion, Islamic and conventional banks and Goedhuys (2002), Saeed (2009), Guariglia et al. (2011) and
can provide financing assistance to firms and help them grow. The Delmar et al. (2013), this study employed the growth of total
present study was conducted in a country with a dual banking assets and employment indicators, in addition to the measurement
system. In other words, firms can borrow money from different of the growth of firms using log differences. The asset growth
types of banks simultaneously. Therefore, the study extended the in this study was defined as the percentage change in the firm’s
above discussion to develop a hypothesis in the case of firms that asset value over the period of study. This value was the sum of
simultaneously utilized both types of bank financing. The present tangible and intangible assets. Apart from that, firm employment
study proposes the following hypotheses: growth was defined as the percentage increase in permanent full-
H3: There is a positive relationship between the implementation of time employees.
Islamic bank financing and asset growth when firms utilize it
simultaneously with conventional bank financing. The first variable used in this study was firm size. According to
H4: There is a positive relationship between the implementation of Beck et al. (2008), it is a significant illustrative factor for funding
Islamic bank financing and employment growth when firms arrangements. They explained that large firms tend to apply for
utilized it simultaneously with conventional bank financing. more bank financing and correspondingly less informal or alternate

International Journal of Economics and Financial Issues | Vol 9 • Issue 4 • 2019 183
 Al-Rdaydeh, et al.: Bank Financing and Firm Growth: The Role of Islamic Bank Financing

options. Nonetheless, there is no generally held view as to the 3.3. Analysis Technique
relationship between firm size and growth, as demonstrated by The relationship between the variables was analyzed using the
Storey (2016), Evans (1987) and Wiklund (1998). Studies by panel data analysis. According to Hsiao (1986) and Yaffee (2003),
Oliveira and Fortunato (2006) and Audretsch and Elston (2002), this analysis tool is utilized globally by researchers and depends
found that due to limited funding, small firms portrayed the principally on a set of data collected over various time points, for
negative influence of financing on firm growth. On the other hand, a specified observation of individual variables. In addition, panel
Wiklund (1998) and Katsikeas and Piercy (1993), showed that the data analysis has shown to be more beneficial and valuable than
relationship between firm size and growth is positive. The third time series or cross-section analysis. This is due to its ability to
observation by other studies however (Almeida and Campello, offer more degrees of freedom, alleviate multicollinearity among
2007; Katsikeas and Piercy, 1993), noted a faster growth rate for variables, eliminate unobserved heterogeneity in each observation
smaller firms. Following the observations, firm size was measured in the sample, and reduce bias (Baltagi, 2005).
by computing the natural logarithms of the total asset of firms to
reduce the influence of outliers in the regression analysis. The following models demonstrate the mathematical explanations
that were employed in this study. Moreover, the multiple regression
The second control variable was firm age. This variable dictated technique was applied to the full sample based on the formula
the tendency of young firms to achieve faster growth than older below:
ones, and that they depended on internal rather than bank financing.
Nonetheless, the relationship between age and growth is not a + β1 IBFit + β 2 MBFit + β3 SIZEit
AGit =
straightforward. Some studies (Das, 1995; Elston, 1993), observed  (1)
+ β 4 AGEit + β5 ROAit + β 6 OCit + β 7TI it + ε it
a positive relationship between the two variables, and some
(Becchetti and Trovato, 2002; Hobdari et al., 2009) demonstrated a + β1 IBFit + β 2 MBFit + β3 SIZEit
EGit =
an opposite negative result. This divergence in results is not  (2)
+ β 4 AGEit + β5 ROAit + β 6 OCit + β 7TI it + ε it
surprising due to the intricacy of the factors and dynamics that
affect growth, particularly in the case of young firms. In the case Where, AG and EG refer to the Jordanian firm growth expressed by
of older firms, their access to financing improves with age, and assets growth and employment growth respectively. IBF represent
they are more likely to have a positive age/growth linkage. On a dummy variable for firms using Islamic or conventional bank
the other hand, Yasuda (2005) who found a strong association of financing, MBF represent a dummy variable for firms using Mixed
firm size and age, indicated that there was a negative impact of
or conventional bank financing, SIZE refer to the size of firm,
age on growth. The current study took into account the age of the
AGE refer to the firm age, ROA represent the return on assets of
frim at the end of 2016 from the date of incorporation. Natural
the firm, OC denote for ownership concentration of the firms and
logarithms of this variable were used in the analysis to decrease
TI represent a dummy variable for the type of industry of firms.
the effect of outliers.

The next control variable is the industry sector. According to 4. RESULTS

Delmar et al. (2003), the growth of a firm is correlated with its
industry association. Meanwhile, Gilbert et al. (2006), stated 4.1. Descriptive Statistics
that the growth of any particular sector will effectively draw Firms in the study sample were categorized according to the ASE
in other associated firms due to the inter-firm network in any listed firms, as either service or industrial. The 550 observations for
specific industry. A study by Gilbert et al. (2006) demonstrated Industrial firms accounted for 48.7% of total observations for the
a further developed variable; an industry’s development stage sample firms, whereas the 580 service firm observations accounted
had a considerable impact on the growth of a firm, in addition for 51.3% of the total number of 1,130 observations. In the present
to the firm’s status in the network. Following Beck et al. (2005), study, two dummy variables were employed to differentiate the
the firms were chosen in this study were categorized as either firms which implemented Islamic or mixed bank financing from
industrial or service sector, as a device to regulate influences conventional bank financing. The results demonstrated that 405
of either sector, therefore has a dummy variable for each of the firms that employed Islamic or mixed bank financing made up
two sectors. 35.8% of 1,130 total observations. Meanwhile, 725 observations
were firms that utilized conventional bank financing, accounting
Moving on, the profitability of firm was the fourth control for 64.2% of the total 1,130 observations.
variable due to its importance as the threshold of the growth of
a firm (e.g., Demirgüç-Kunt and Maksimovic, 1998; Hamouri Table 1 presents the descriptive statistics for the key variables
et al., 2018). Return on assets (ROA) was applied as a locus to in this study in terms of their means, minimum, maximum,
determine a firm’s profitability. Lastly, the ownership structure and standard deviations. Although the results illustrated a wide
of the firm was also chosen as a control variable due to its variance between the value significance at specific time points, this
importance in the performance and growth of a firm. One of is not an unusual result in growth-related matters. As illustrated by
the aspects of a firm’s ownership structure was ownership Papadakis (2007) and Hitt et al. (2001), firms may decide to pursue
concentration. The influence of concentrated ownership growth by expanding their products. It is also worth noting that
structures is documented in the research of (Chen et al., 2005; the most economically sound and efficient method of expansion
Claessens et al., 2002). is by acquisition or merger. Although the use of this stratagem

184 International Journal of Economics and Financial Issues | Vol 9 • Issue 4 • 2019
 Al-Rdaydeh, et al.: Bank Financing and Firm Growth: The Role of Islamic Bank Financing

facilitates significant increases in asset and employment growth at Next, Table 4 shows the regression model findings that tested
particular time points, the opposite may also cause by unexpected H2 and H4 concerning two cases, as presented in the previous
circumstances whereby the firm in its entirety or parts of it was regression model. The first case examined the impact of Islamic
sold. This may cause significantly low asset and employment bank financing on employment growth. The results proved that
growth. Apart from that, firm size and firm age were measured Islamic and conventional bank financing had a significant and
by employing the natural logarithm of the numbers. The results of positive relationship with employment growth in Jordanian
firm size showed that the variable varied from 13.4 to 21.3 with a firms. These agree with Volk and Trefalt (2014), Rahaman (2011)
mean ratio of 17. Meanwhile, the variable of firm age varied from and Ullah and Wei (2017). On the other hand, the result of the
0.69 to 4.35 with a mean ratio of 2.81. dummy variable used to distinguish Islamic and conventional
bank financing showed that Islamic bank financing had a more
With regard to the correlation between study variables shown in significant impact on the growth of employment compared to
Table 2, the size of the firm had a negative and positive relation conventional bank financing. Meanwhile, the second case involved
to employment growth and assets growth, but the association was the simultaneous use of both types of financing by the same
not significant. In addition, profitability (r=−0.0.075, P<0.10) firm. The results from this case demonstrated that a mixed bank
correlated with asset growth negatively. financing had a significant impact on the growth of employment
growth of firms. In addition, the results based on the dummy
4.2. Empirical Results variable showed that mixed bank financing has a more significant
Table 3 presents the regression model results that tested H1 and impact on employment growth compared to conventional bank
H3 concerning two cases. The first case explored the effect of financing alone. Following these observations, it can be seen that
implementing Islamic bank financing on asset growth. The results the implementation of Islamic or mixed bank financing by firms
demonstrated that Islamic and conventional bank financing had can encourage employment growth.
a significant and positive relationship with the asset growth in
Jordanian firms. This agrees with Rahaman (2011), Al-Rdaydeh All in all, the results further reiterated that the utilization of bank
et al. (2019) and Ullah and Wei (2017). Nonetheless, the result of financing (Islamic or conventional bank financing or both) by firms
the dummy variable used to distinguish Islamic and conventional can promote the growth of assets and employment. Shabani et al.
bank financing showed that the utilization of Islamic bank (2014) concurred with this conclusion.
financing had a more significant impact on asset growth compared
to conventional bank financing. Furthermore, the second case 5. DISCUSSIONS AND CONCLUSION
involved firms that implement both Islamic and conventional
bank financing simultaneously. The results demonstrated the dual This study hypothesized that bank financing is an indicator of the
financing system had a significant positive impact on the asset growth of a firm. It was expected the implementation of improved
growth of firms compared to the utilization of conventional bank conventional or Islamic bank financing will improve the growth
financing alone. Overall, the results proved that the use of Islamic of the firms. As presented in the previous section, the results
or mixed bank financing by firms can promote asset growth. justified the hypothesis. It is worth noting that there were some

Table 1: Descriptive statistics

Variables Observations Mean SD Maximum Minimum
AG 1125 0.0937 0.1913 2.2610 −0.7946
EG 1125 0.0714 0.1734 1.7687 −2.0898
SIZE 1123 17.0421 1.3636 21.3102 13.4950
AGE 1122 2.8108 0.7659 4.3567 0.6931
ROA 1125 0.0222 0.0906 0.4946 −0.6001
OC 1118 0.5421 0.2281 0.99 0.05
AG: Assets growth. EG: Employment growth, SIZE: The size of firm, AGE: The firm age, ROA: The return on assets of the firm, OC: Ownership concentration of the firms

Table 2: Correlation between variables

AG EG IBF MBF SIZE AGE ROA OC TI
AG 1
EG 0.504* 1
IBF 0.115* 0.052 1
MBF 0.082* 0.064* −0.159* 1
SIZE 0.056 −0.013 −0.035 0.025 1
AGE −0.160* −0.162* −0.083* −0.125* 0.103* 1
ROA 0.075* 0.002 0.096* −0.003 0.230* 0.084* 1
OC 0.001 0.006 0.065* 0.060* 0.149* −10.081* −0.018 1
TI −0.045 −0.025 −0.145* 0.031 −0.238* 0.288* −0.049 −0.074* 1
Level of significance *P<0.10, **P<0.05; AG: Assets growth, EG: Employment growth, SIZE: The size of firm, AGE: The firm age, ROA: The return on assets of the firm,
OC: Ownership concentration of the firms, IBF: A dummy variable for firms using Islamic or conventional bank financing, MBF: A dummy variable for firms using Mixed or conventional
bank financing, TI: A dummy variable for the type of industry of firms

International Journal of Economics and Financial Issues | Vol 9 • Issue 4 • 2019 185
 Al-Rdaydeh, et al.: Bank Financing and Firm Growth: The Role of Islamic Bank Financing

Table 3: Regression results broaden their knowledge and business acumen, empowering them
Independent variables Dependent variable: Assets to contribute to the strong growth of the firm. As mentioned by
growth‑ regression with robust Yusof and Bahlous (2013) these advantages there will also have
standard errors a positive impact on the country’s fiscal and social development.
Coef. Std. Err. VIF
IBF 0.0847* 0.0423 1.07 Moreover, Islamic bank financing is straightforward, stable,
MBF 0.1066** 0.0443 1.05 and has unbreakable ties to the economy and to actual personal
SIZE 0.0487 0.0331 1.19 contact and interaction. This is in contrast to impersonal electronic
AGE −0.1303** 0.0291 1.17 transactions. This is pertinent for firms that prefer actual real-time
ROA 0.2652*** 0.0592 1.08
OC −0.0629 0.0811 1.04 businesses, and they can seek this support through Musharaka
TI 0.0131 0.0097 1.22 and Mudaraba service. A benefit would be an improved output
Constant −0.3680 0.4923 and quality of businesses. In addition, the circulation between
R squared 0.07 businesses and banks relies on the generation of profits. This is
F‑Statistic 0.00 unlike Murabaha which, like other systems centered on sales,
Number of observation 1118 demands the physical movement or transfer of goods or delivery
Level of significance *P<0.10, **P<0.05, ***P<0.01. AG: Assets growth, of services. Similar regulations are enforced in the lease of assets.
EG: Employment growth, SIZE: The size of firm, AGE: The firm age, ROA: The return
on assets of the firm, OC: Ownership concentration of the firms, IBF: A dummy variable Therefore, it is obligatory for all types of Islamic bank financing
for firms using Islamic or conventional bank financing, MBF: A dummy variable for to include real products, goods or services. This obligation is
firms using Mixed or conventional bank financing, TI: A dummy variable for the type of in contrast to the conventional bank financing system. In the
industry of firms
conventional system, firms are only obliged to meet its debt
repayments, while Islamic banks focus on the predicted profit
Table 4: Regression results generating assessment as the key stipulation.
Independent variables Dependent variable: Employment
growth‑regression with robust A limitation of the present study is that it is only focused on
standard errors one developing country. Further studies should include samples
Coef. Std. Err. VIF from other developing countries. In addition, the same model
IBF 0.0388** 0.0191 1.07 could also be used to compare the growth of firms in developed
MBF 0.0275* 0.0152 1.05
SIZE 0.0028 0.0049 1.19
and developing countries. Although the current study failed to
AGE −0.0391*** 0.0101 1.17 find supporting empirical evidence on the relationship between
ROA 0.0551 0.0977 1.08 the growth of firms and the use of Islamic bank financing,
OC −0.0104 0.0326 1.04 the current research is an empirical study adopting this novel
TI 0.0171 0.0158 1.22 variable. Nevertheless, this study used conceptual and theoretical
Constant 0.1249 0.0892
interpretations from the conventional banking industry and other
R squared 0.10
F‑Statistic 0.00 types of firms to develop the presumed assumptions.
Number of observation 1118
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