The choice of financial structure in the presence of Islamic financial instruments: Theoretical reflections on the decisions of SMEs

Abstract

Given the interest in SMEs in developed and developing economies, special attention should be given to these productive entities. The development of academic and professional literature has always emphasized the issue of financing as a major obstacle to the evolution of SMEs. Faced with the presence of a range of financial instruments on the current financial landscape, SMEs have difficulty choosing the instrument that best optimizes their financial structure. The objective of this paper is to understand the financial behavior of SMEs when they use Islamic finance instruments, especially in the absence of specific tax benefits for Islamic debt contracts. To do this, we study the impact of taxation on the choice of the financial structure of the SME in the presence of two instruments of Islamic finance namely; the Murabaha contract and the Profit and Loss Sharing contracts. Two conclusions are drawn from this paper. The non-existence of any tax advantage granted to the Murabaha contract and the imposition of a debt ratio based on the value of tangible assets makes this financial instrument less attractive. Hence, strong adequacy of the 3P contracts to the needs of SMEs.