Does Islamic Label Indicate Higher use of Trade Credit? Evidence from Sharīʿah Compliant Non-financial Firms in Pakistan.

Abstract

This study attempts to investigate the behavior of non-financial Islamic label firms towards usage of trade credit. In line with the previous literature, it is hypothesized that Islamic label “Sharīʿah Compliant” indicates higher use of trade credit by such firms, both demand and supply of trade credit. It is also hypothesized that trade credit is substitute of bank loan. The results are based on 338 non-financial firms listed on Pakistan Stock Exchange for 2008 to 2016 observation period. These include non-financial firms from all sectors. The study used random Generalized Method of Moment (GMM) estimation technique to explore the relationship of Islamic label and usage of trade credit as it is the most powerful method when sample size is large. The study found that Islamic label firms use more trade credit, as compared to conventional firms that have more access to bank loan. This study also found that firms with Islamic label prefer trade credit over the bank credit. The result of this study proves all stated hypotheses.