How Feasible a Convertible Ijarah Contract for Sme’s Financing: A Simulation Approach

Abstract

Islamic financial institutions have relied for decades on margin-based contracts to provide financing for the business sector, despite the basic idea that Islamic finance is expected to provide an equity-based or a profit and loss sharing (PLS) contract. This fact raises the need to encourage the use of a margin-based instrument with an innovative scheme that allows for conversion of the contract into a PLS-based contract. Moreover, we propose a convertible ijarah contract to fill this need. A convertible ijarah contract is an ijarah (rent) contract that is convertible to a PLS contract according to the Islamic financier's decision. In this study, we simulate three scenarios of project financing with (a) murabaha as a margin-based contract, (b) musharaka as a PLS contract and (c) a convertible ijarah contract. The aim is to evaluate whether the convertible ijarah contract will provide a higher return for the financier compared to the other contracts. The main input of the simulation is nine sectors of Indonesian SMEs' financial performance. We found that when the financial performance of Indonesian SMEs was measured by short-term financial performance, the convertible ijarah contract outperformed the murabaha contract for all sectors but did not outperform the musharaka contract, except for low-margin sectors. However, when the financial performance of Indonesians SMEs was measured by long-term economic performance, we found that the convertible ijarah contract outperformed the murabaha contract and musharaka contract for almost all sectors.

The Impact of Financial Literacy on the Investment Decision of Non-Donation-Based Crowdfunding in Indonesia

“…There are two major sources of equitybased financing exist in Indonesian market, venture capital firms and capital market. However, venture capital firms selectively put their investment on highly growth potential start-ups and tend to avoid small business (Macht & Weatherston, 2014) while the capital market cannot be accessed by SME's (Dalimunthe, Syakhroza, Nasution, & Husodo, 2019) Recently, crowdfunding activities in Indonesia have expanded to include non-donation forms. For example, kitabisa.com has developed an application for crowdfunding to finance business activities that generally involve small-scale businesses.…”

Implementasi Pembiayaan Akad Ijarah di BMT UGT Sidogiri Lumajang

“…Koperasi BMT UGT Sidogiri lumajang pertama kali berdiri dan beroperasi pada tahun 2006, diresmikan dan mulai beroperasi pada tanggal 6 Agustus 2006. BMT UGT Sidogiri cabang Lumajang didirikan guna untuk memperkenalkan dan juga mengembangkan perekonomian berdasarkan syariah Islam (Dalimunthe, 2019). BMT UGT Sidogiri didirikan awalnya karena berawal dari keprihatian dari pengurus dan guru di sidogiri kepada peda-gang-pedagang kecil yang berjualan di sekitar pondok sidogiri.…”

A Shari’ah Analysis of the National Higher Education Loan Scheme in the Maldives

“…Conversely, Ijarah relates to a contract that transfers ownership of permissible usufruct or services for a specified duration in exchange for predetermined compensation (Dalimunthe et al, 2019). In Malaysia, Islamic banks adopt Ijarah Al-Ash Khass as a contract for offering education financing schemes.…”