Islamic Finance an alternative mode for short term financing – working capital management

Umar Nawaz Kayani

International Journal of Islamic and Middle Eastern Finance and Management, 2022, vol. 16, issue 2, 310-322

Abstract: Purpose - This paper aims to review and compare the conventional and Islamic perspectives of working capital management (WCM) to devise the best option of financing for managing working capital (WC) in South Asia. The paper also aims to help the business world for running its operations more smoothly by devising an alternative source of financing especially during crises such as the global financial crisis 2008 and the COVID-19 pandemic. Design/methodology/approach - The divergence approach is used for a critical analysis of existing literature to derive the best possible alternative to the conventional system of financing. Findings - This paper identifies that Islamic financing is an appropriate mode of financing as compared to conventional financing for meeting WC requirements in South Asia. Furthermore, under Islamic financing, the best available alternative way for managing WC needs is theMudarabahIslamic mode of financing. Research limitations/implications - This is a theoretical paper and thus does not include empirical results. Practical implications - This paper provides conventional and Islamic perspectives of WCM. The Islamic banks in South Asia may devise policies to encourage and convenience firms for usingMudarabahmode for meeting their WC needs instead of conventional sources. This paper also identifies that small and medium enterprises may be targeted by Islamic banks in Asian markets for providing funds for their smooth operations especially during a financial crisis when conventional banks refuse to lend. This will help managers to run businesses more efficiently and effectively especially during any kind of financial crisis in the future. Originality/value - To the best of the author’s knowledge, this is the first study that studies the relationship between WCM and Islamic financing in comparison to conventional financing. Although prior studies identify an alternative to conventional financing as Islamic financing, no one studied while considering the WC as the main variable. This paper informs practitioners and researchers about a “state of the art” Islamic perspective of WCM.

Keywords: Conventional financing; Divergence approach; Global financial crisis; Islamic financing; Working capital management (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-07-2021-0290

DOI: 10.1108/IMEFM-07-2021-0290

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