Idea of Collateral and Guarantor in Islamic Bank Financing
Article Sidebar
Main Article Content
Abstract
This study explores the idea of Islamic banks requesting for collateral or guarantee when financing, the rationale for requesting loan security, and its acceptability from Islamic perspectives. The study reviewed the previous literature and Islamic injunctions to study and justify the use of collateral and guarantor to hedge the risk of financing default. It is found that Islamic banks like conventional banking system encourage requesting loan security to ensure borrowers’ commitment and protect investors’ wealth. Despite its effect on loan rejection, secured loans are found to be recovered more easily than unsecured loans. Government and Islamic banks are therefore advised to device mean for helping small-scale businesses to access financing, through credit guarantee schemes and participatory financing mechanisms, to enhance financial inclusion.
Downloads
Article Details
Copyright (c) 2018 Idris Yahaya Adamu
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abdouli, A. H. (1991). Access to finance and collaterals: Islamic versus western banking.
Abildgren, K., Drejer, P. A., & Kuchler, A. (2013). Banks’ loan rejection rates and the creditworthiness of the banks’ corporate customers. Danish Journal of Economics, 151(2), 207-224.
Adams, D. W., & Nehman, G. I. (1979). Borrowing costs and the demand for rural credit. The Journal of Development Studies, 15(2), 165-176.
Akpan, S. B., Patrick, I. V., Udoka, S. J., Offiong, E. A., & Okon, U. E. (2013). Determinants of credit access and demand among poultry farmers in Akwa Ibom State, Nigeria. American Journal of Experimental Agriculture, 3(2), 293.
Al-Ajmi, J., Abo Hussain, H., & Al-Saleh, N. (2009). Clients of conventional and Islamic banks in Bahrain: How they choose which bank to patronize. International Journal of Social Economics, 36(11), 1086-1112.
al-Anshari, A. Z. (n.d.). Fath al-Wahab (Singapura: Suleiman Mariy. 192.
Al-Qurashi, A. (1999). Tafsir al-Quran al-Azim (Vol. 1). Riyadh: Dar Taiyyibah Li al-Nasyar wa al-Tauzi.
Bai, Y., & Lu, L. (2018). Households rejecting loan offers from banks. Journal of banking & Finance.
Bensaid, B., Grine, F., Nor, M. R. M., & Yusoff, M. Y. Z. M. (2013). Enduring financial debt: an Islamic perspective. Middle-East Journal of Scientific Research, 13(2), 162-170.
Berger, A. N., Espinosa-Vega, M. A., Frame, W. S., & Miller, N. H. (2011). Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information. Journal of Financial Intermediation, 20(1), 55-70.
Berger, A. N., Frame, W. S., & Ioannidou, V. (2016). Reexamining the empirical relation between loan risk and collateral: The roles of collateral liquidity and types. Journal of Financial Intermediation, 26, 28-46. doi: https://doi.org/10.1016/j.jfi.2015.11.002
Bharath, S. T., Dahiya, S., Saunders, A., & Srinivasan, A. (2009). Lending relationships and loan contract terms. The Review of Financial Studies, 24(4), 1141-1203.
Booth, J. R., & Booth, L. C. (2006). Loan collateral decisions and corporate borrowing costs. Journal of Money, Credit and Banking, 67-90.
Chakravarty, S., & Yilmazer, T. (2005). A Reexamination of the Role of “Relationships” in the Loan Granting Process. Promises & Pitfalls: As Consumer Finance Options Multiply, Who Is Being Served and at What Cost.
Chang, C.-C., Chung, S.-L., & Yu, M.-T. (2006). Loan guarantee portfolios and joint loan guarantees with stochastic interest rates. The Quarterly Review of Economics and Finance, 46(1), 16-35.
Chen, Y. (2006). Collateral, loan guarantees, and the lenders’ incentives to resolve financial distress. The Quarterly Review of Economics and Finance, 46(1), 1-15.
Dasgupta, A. K. (1972). Cost-benefit analysis: theory and practice.
De Aghion, B. A. (1999). On the design of a credit agreement with peer monitoring. Journal of development economics, 60(1), 79-104.
Edelberg, W. (2004). Testing for adverse selection and moral hazard in consumer loan markets.
Frame, W. S., Srinivasan, A., & Woosley, L. (2001). The effect of credit scoring on small-business lending. Journal of Money, Credit and Banking, 813-825.
Ghatak, M., & Guinnane, T. W. (1999). The economics of lending with joint liability: theory and practice1. Journal of development economics, 60(1), 195-228.
Guttman, J. M. (2007). Repayment performance in microcredit programs: theory and evidence.
Hubbard, R. G., Kuttner, K. N., & Palia, D. N. (2002). Are there bank effects in borrowers' costs of funds? Evidence from a matched sample of borrowers and banks. The Journal of Business, 75(4), 559-581.
Jiménez, G., & Saurina, J. (2004). Collateral, type of lender and relationship banking as determinants of credit risk. Journal of banking & Finance, 28(9), 2191-2212.
Kong, R., Turvey, C., Xu, X., & Liu, F. (2014). Borrower attitudes, lender attitudes and agricultural lending in rural China. International Journal of Bank Marketing, 32(2), 104-129.
Krasniqi, B. A. (2010). Are small firms really credit constrained? Empirical evidence from Kosova. International Entrepreneurship and Management Journal, 6(4), 459-479.
Lawal, I. M. (2016). The Permissibility of Security (Collateral) in Islamic Banking. Journal of Islamic Economics, Banking and Finance, 113(3517), 1-22.
Manove, M., Padilla, A. J., & Pagano, M. (2001). Collateral versus project screening: A model of lazy banks. Rand journal of economics, 726-744.
Maulidia, L. R. (2003). The Optimizing of Rahn Service for The Development of Islamic Banking in Indonesia. Jurnal Iqtisad, 4(2).
Nasir, S., Khalid, M., & Mahmood, A. (2004). Saving-investment behaviour in Pakistan: An empirical investigation [with Comments]. The Pakistan Development Review, 665-682.
Paxton, J. A. (1996). Determinants of successful group loan repayment: an application to Burkina Faso. The Ohio State University.
Pearlman, S. (2012). Too vulnerable for microfinance? Risk and vulnerability as determinants of microfinance selection in Lima. Journal of Development Studies, 48(9), 1342-1359.
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The journal of finance, 49(1), 3-37.
Rajan, R., & Winton, A. (1995). Covenants and collateral as incentives to monitor. The journal of finance, 50(4), 1113-1146.
Riding, A., Madill, J., & Haines, G. (2007). Incrementality of SME loan guarantees. Small Business Economics, 29(1-2), 47-61.
Riding, A. L., & Haines, G. (2001). Loan guarantees: Costs of default and benefits to small firms. Journal of business venturing, 16(6), 595-612.
Sharif, D., Shaharuddin, A., Muhamed, N. A., Pauzi, N. S., & Zin, M. Z. M. (2013). The improvement of Ar-Rahn (Islamic pawn broking) enhanced product in Islamic banking system. Asian Social Science, 9(2), 36.
Siddiqui, A. H. (1972a). Translation of Sahih al-Bukhari, Sahih al-Bukhari, book of Tawheed book no 97 (Vol. 2). Lahore.
Siddiqui, A. H. (1972b). Translation of Sahih Bukhari, Volume 4. Sahih al-Bukhari sales and trade Book 34, Hadith 49 (Vol. 2). Lahore.
Siddiqui, A. H. (1972c). Translation of Sunan Abu Dawood, Volume 4. Sunan Abu Dawood, Wages (Kitab Al-Ijarah) Book 24, Hadith 126 (Vol. 2). Lahore.
Siddiqui, A. H. (1972d). Translation of Sunan Ibn Majah, Volume 4. Sunan Ibn Majah, the chapters on charity Book 15, Hadith 2497 (Vol. 2). Lahore.
Siddiqui, A. H. (1972e). Translation of Sunan Ibn Majah, Volume 4. Sunan Ibn Majah, The Chapters on Charity Book 15, Hadith 2525 (Vol. 2). Lahore.
Simtowe, F., Zeller, M., & Phiri, A. (2006). Determinants of moral hazard in microfinance: Empirical evidence from joint liability lending programs in Malawi. African review of money finance and banking, 5-38.