Does Islamic Label Indicate Higher use of Trade Credit? Evidence from Shar¯ı‘ah Compliant Non-financial Firms in Pakistan

Abstract

This study attempts to investigate the behavior of non-financial ISL firms towards usage of TC. In line with the previous literature, it is hypothesized that ISL “Shar¯ı‘ah Compliant” indicates higher use of TC by such firms, both demand and supply of TC. It is also hypothesized that TC 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 ISL and usage of TC as it is the most powerful method when sample size is large. The study found that ISL firms use more TC, as compared to conventional firms that have more access to bank loan. This study also found that firms with ISL prefer TC over the bank credit. The result of this study proves all stated hypotheses.