Volume 18, Number 2, December 2023
| Shariah in Indonesia: How its debt limitation affects working capital management
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Abstract
This paper examines whether the Shariah and its debt limitation affects the working capital investment behaviour of Shariah-compliant firms (SCFs). Using a sample of firms listed on the Indonesia Stock Exchange from 2012-2018 and controlling for potential sample selection and endogeneity issues, we find that Shariah and its debt limitation do impact SCFs’ trade credit provided by suppliers and net trade credit but do not affect inventory. We identify Shariah, the Islamic law, and debt as factors affecting SCFs’ working capital policy in addition to those factors identified in previous research. Further tests indicate that the Shariah and its debt limitation effects exist mainly for SCFs located in low Muslim proportion provinces. Net trade credit rather than cash conversion cycle should be used to measure working capital management activities, at least for firms listed on the Indonesia Stock Exchange. Overall, our paper highlights the importance of Islamic law and its screening criteria on working capital management decisions.
Keywords: Shariah, Debt Limitation, Trade Credit, Inventory
JEL Classification: G30, G34