Investigating the Institutional Quality Integration with Islamic Banking Development in Promoting Entrepreneurship

Abstract

Empirically, conventional finance has proven insufficient while providing the required finance for startups and entrepreneurs. While handling the risks, entrepreneurs tend to avoid the high-cost nature of the debt, which limits their true potential leading to sub-optimal resource utilization. For this, Islamic finance provides a participative and equitable alternative for new ventures with proven merits, but a lack of supporting regulation hinders its penetration among entrepreneurial aspirants. Islamic banks face high compliance costs to the current institutional requirements while designing the products for new ventures. This study investigates how Islamic finance assists entrepreneurial decisions and the role of institutional quality in aligning Islamic law with commercial law requirements. This study selected the unbalanced panel data of 37 countries between 2011 and 2020 and used panel quantile regression to estimate the quadratic Islamic financial development effects and the moderation of institutional quality. The results showed that generally, Islamic financial development has a U shaped relation with entrepreneurship, but with the improvement in institutions, the U shape is flipped to inverted-U shape. This study points toward the potential of Islamic financing when coupled with better regulations for the economies which are developing the nascent Islamic financing system.