Debt-Based Versus Equity-Based Financing: A Comparative Analysis on Efficiency of Islamic Financial System

Abdullateef Abdulqadir Maikabara, Sri Maulida, Abdulmajeed M Aderemi


Introduction to The Problem: The financial system, as a subset of economics, plays a prominent role in solidifying the socio-economic development and wellbeing of people of a society. However, debt-based and equity-based financing are the main models employed by Islamic financial institutions to help small and medium enterprises (SMEs) that need funding to facilitate their businesses' projects. Operationally, debt-based financing seems to be the prominent financing model than equity-based financing, which only accounts for either zero or small scale in Islamic financial institutions.

Objective Study: This study explores the rightful financing model that can contribute much better to the efficiency of the Islamic financial system in achieving socio-economic development.

Methodology: To achieve the study's purpose, a literature-based method and secondary data collection technique are adopted as related previous studies from articles, books, conferences, and working papers are reviewed and analyzed.

Findings: Equity-based model as a partnership model is somewhat more productive in contributing to socio-economic development than debt-based financing, but not being widely applied due to specific issues such as high risk, agency problem, costumer’s awareness, and sensitivity, and others more. It is recommended that researchers empirically investigate the suitable financing model between debt-based and equity-based financing models to ensure the achievement of sustainable socio-economic development.


Debt; Equity; Financing; Islamic; Islamic financial System

Full Text:



Abdul-Rahman, A., Abdul Latif, R, Muda, R. & Abdullah, M. A. (2014). Failure and potential of profit-loss sharing contracts; A perspective of New Institutional, Economic (NIE) Theory. Pacific Basin Finance Journal, 28, 136–151.

Abdurrahman, S. (2015). Bringing Islamic Banks Closer to the ideal: From Debt-Based Financing to Equity-Based Modes. Proceeding - Kuala Lumpur International Business, Economics and Law Conference,7 (KLIBEL 2015).

Ariffina, N.M., Kassim, S., Abdul Razak, D. (2015). Exploring application of equity-based financing through mushārakah mutanāqisah in Islamic banks in Malaysia: Perspective from the Industry Players. International Journal of Economics, Management and Accounting, 23(2), 241–261.


Biancone, P.P & Radwan, M. (2017). International Entrepreneurship from an Islamic (Sharia Complaint) Perspective “The Opportunities for Western Economies”. World Journal of Accounting, Finance, and Engineering, 1(1).

Duncan, M. (2013). The effect of debt financing on firm profitability of commercial banks in Kenya. In Master of Business Administration. University of Nairobi.

Eddy Yusof, E. F., Kashoogie, J., & Anwar Kamal, A. (2009). Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari’ah. Munich Personal RePEc Archive (MPRA), Paper No, 20722.

Fianto, B. A., Gan, C., Hu, B., &, & Roudaki, J. (2018). Equity financing and debt-based financing: Evidence from Islamic microfinance institutions in Indonesia. Pacific-Basin Finance Journal, 52, 163–172.

Hassan, R. (2011). Islamic Banking and Finance ((2nd Editi). Petaling Jaya, Selangor Darul Elsan, Malaysia: Pearson Malaysia Sdn Bhd.

Hermes, N., & Lensink, R. (2011). Microfinance: its impact, outreach, and sustainability. World Development, 39(6), 875–881.

Islam, R. & Ahmad, R. (2020). Applicability of Mudarabah and Musharakah as Islamic Micro-equity Finance to Underprivileged Women in Malaysia. European Journal of Development Researc, 32(1), 176–197.

Khan, H. (2015). Some implications of debt versus equity-based financing in the backdrop of financial crises. Journal of King Abdulaziz University: Islamic Economics, 28(1), 165-180.

Lewis, M. (2015). Models of Islamic banking: The role of debt and equity contracts. Journal of King Abdulaziz University: Islamic Economics, 28(1), 151–164.

Madun, A., Kamarulzaman, Y., & Roslan., & N. F. Z. (2015). The Challenges on the marketing of Equity-based financing products of Islamic Banking. International Conference on Islamic Marketing and Branding Proceeding, 161–180.

Maikabara, A. A. (2019). Why Islamic Banks Focus More on Debt-Based Financing Than Equity-Based Which Is More Shariah Compliant?. Available at SSRN Electronic Journal.

Mariam, N.S., Isnurhadi, & T. (2017). The Impact of Debt Financing and Equity Financing on Profit Expense Ratio of Islamic Banks in Indonesia. JEMBATAN–Jurnal Ilmiah Manajemen Bisnis Dan Terapan, 14(2).

Rahman, A. A., Nor, S. M., & Salmat, M. F. . (2020). The application of venture capital strategies to musharakah financing. Journal of Islamic Accounting and Business Research, 11(3), 827–844.

Sapuan, N. M. (2016). An evolution of Mudarabah contract: a viewpoint from classical and contemporary Islamic scholars. Procedia Economics and Finance, 35(3), 349–358.

Wahyudi, R., Diniyya, A.A., Satyarini, J.N.E, Mutmainah, L. & Maulida, S. (2020). The Effect of Debt-Based Financing and Equity-Based Financing on Islamic Banks Profitability in Indonesia. International Journal of Islamic Business and Economics, 4(2), 106–114.

Wahyudi, R., Mujibatun, S., & Riduwan, R. (2019). Debt and Equity Based Financing: Size, and Islamic Banks Profitability: Empirical Evidence from Indonesia. IQTISHADIA, 12(2), 227-239.



  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Ihtifaz : Journal of Islamic Economics, Finance, and Banking

Kampus 4 Universitas Ahmad Dahlan
Jl. Ring Road Selatan, Tamanan, Banguntapan, Bantul, Daerah Istimewa Yogyakarta 55191
Telp. (0274) 563515; Fax. (0274) 564604
E-mail : 

p-ISSN: 2622-4755 | e-ISSN: 2622-4798

View My Stats