Maqāṣid Entrepreneurial Finance: An Islamic Approach to Small Business Capital Structure Theory

Abstract

\ Purpose — This research aims to develop a novel construct, maqāṣid entrepreneurial finance (MEF), based on an Islamic perspective to measure small and medium enterprises’ (SMEs) capital structure. Design/Methodology/Approach — The MEF construct was developed using indicators based on maqāṣid al-Sharīʿah (the objectives of Islamic law) and entrepreneurial finance. A series of empirical studies were conducted to develop and validate an instrument to capture the MEF and its parameters. The development stages involved two steps: the item development and scale measurement stages. Findings — The results of the factor analysis showed that five factors make up the MEF. These factors are generating and distributing profit, interest-free source of capital, distribution of income for the payment of zakat (compulsory alms) and ṣadaqah (optional alms), the provision from income for reinvestment, and avoiding haram (prohibited) investment. Originality/Value — The paper’s overarching contributions are: first, it contributes to the development of the capital structure theory based on the Sharīʿah perspective; second, it contributes to the advancement of the capital structure theory for SMEs; third, it provides policy input to stakeholders in the SME field; and fourth, it provides practical guidelines relevant to SMEs. Practical Implications — This research provides insight to academicians and managers on how MEF is constituted. For SME owners, the results of this study confirmed that maqāṣid al-Sharīʿah can be integrated into the capital structure decision of SMEs.