Journal of Islamic Monetary Economics and Finance, Vol. 9, No. 2 (2023), pp. 199 - 224
p-ISSN: 2460-6146, e-ISSN: 2460-6618

FINANCIAL SUSTAINABILITY OF A FIRM:
DEBT-BASED OR EQUITY-BASED FINANCING TO PURSUE?
Umul Ain’syah Sha’ari1, Siti Raihana Bt Hamzah2 and Karmila Hanim Kamil3
Universiti Sains Islam Malaysia, Malaysia, ainumul18@gmail.com
Universiti Sains Islam Malaysia, Malaysia, sraihana@usim.edu.my
3
Universiti Sains Islam Malaysia, Malaysia, karmila@usim.edu.my

1
2

ABSTRACT
This study examines the potential of utilizing equity-based financing by companies
in achieving financial sustainability as compared to debt-based financing. To this
end, a conceptual framework of equity-based financing over debt-based financing
is developed to provide an understanding of the concept of equity-based financing.
Subsequently, this study analyses the credit risk exposure between equity and debt for
selected sectors in Malaysia. More specifically, a Monte Carlo method is employed to
examine the feasibility of the equity-based financing model in fostering the financial
sustainability of companies through simulation of equity-based and debt-based
financing models from the global financial crisis (GFC) period to the Covid-19 phase.
This study finds that equity-based financing can reduce credit risk exposure when
returns are tied to the company’s performance. The findings also show that equitybased financing can achieve financial sustainability regardless of any economic events.
To conclude, equity-based financing can thus be a viable capital financing option for
companies because it can contribute to long-term financial sustainability.
Keywords: Equity-based financing, Financial sustainability, Monte carlo simulation, Economic
crisis.
JEL classification: G32; G39; C6; G01.
Article history:
Received
: December 9, 2022
Revised		
: February 22, 2023
Accepted
: May 30, 2023
Available online : May 31, 2023
https://doi.org/10.21098/jimf.v9i2.1653

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I. INTRODUCTION
Generally, a company can be financed either by debt and equity or 100% equity
for its operations (Damodaran, 2014). The decision by the management on the
choices of financing will finally make up the capital structure of the company. The
debt-based financing is considered the most preferred capital financing among
well-established companies, mostly due to the benefits of interest tax savings,
seniority claims, and lower cost as compared to equity-based financing. However,
the increased issuance of debt-based financing can potentially harm the soundness
of the companies and consequently the entire financial system. This condition is
evidenced by the credit crisis occurrence in 2007/2008.
The credit crisis originated from the collapse of the United States housing
market, also known as the subprime mortgage crisis, in 2006 spread to the entire
world in 2007 and 2008 (Hanim Kamil, Abdullah, Shahimi, & Ismail, 2010). This
credit crisis has had substantial impact on companies with high debt due to the
dwindling availability of credit and greater difficulties in acquiring external funds
(Adjei, 2012). The effect of this credit crunch has hindered credit access to businesses
and households. According to Kashyap and Stein (1994), financial shocks like
the subprime mortgage crisis have an impact on companies by limiting credit to
companies that offer profitable trading and investment opportunities. It can be
seen when companies generally have limited internal funds during recessionary
times and hence are in increasing need for external funds (Braun and Larrain,
2005). Highly indebted companies should find it more expensive to seek external
funding due to the restricted availability of credit during the subprime mortgage
crisis. However, companies that typically use less external funds should have
reduced borrowing costs or be able to obtain funds quickly to lessen the impact of
the crisis. Therefore, companies with higher levels of debt-based financing might
experience a greater degree of hardship during the crisis since they may not be
able to gain external funds to settle their debt obligations (Hamzah et al., 2018).
This situation will then be affecting their ability to sustain in the long run, leading
them to the edge of bankruptcy (Hanim Kamil et al., 2010). Thus, the companies
would be unable to achieve financial sustainability to continue their operations in
the future.
With the failure of Lehman Brothers in September 2008, the credit crisis
reached its height (Peels et al., 2009). In the context of the major financial crisis,
the collapse of Lehman Brothers is the result of a very aggressive leverage policy
by the company. Due to the crisis, all companies were forced to focus more
attentively on their cash flow. This led to significant decreases in investments and
capital spending, while cost savings were encouraged by lowering the company’s
operating working capital, which was primarily accomplished by cutting back on
inventories. In the wake of the 2007/2008 crisis, the majority of economic scholars
deliberated that the risk-shifting feature of debt financing and excessive leveraging
as the main causes of global financial failure. The risk-shifting problem arises
when companies take more risk at the expense of their investors. The company
seemed to be reducing the risk of default by shifting risk to the investors, where in
fact, they are distributing those risks throughout the entire global financial system
by compounding them.

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Building on lessons from this crisis, regulatory reforms need to be in place for
the financial system so that it will be in a position of strength as a shock absorber
during any economic downturns and an enabler for economic recovery (Bank
Negara Malaysia, 2022). Among the key initiatives for the reform is the need for the
financial system to rebound with risk-sharing features in place of the risk-shifting
features of debt-based financing. Economic scholars agree that equity-based
financing of the Islamic financial system is the closest instrument to represent risksharing behavior (Brunnermeier & Oehmke, 2012; Kuala Lumpur Declaration,
2012; Effendi, Syifa, Sabiti, & Nursyamsiah, 2018). Researchers also acknowledged
that the attempt of issuing equity-based financing to raise funds in avoiding debtbased financing is consistent with the practice of Islamic finance that promotes
profit and loss sharing, interest-free and no risk-free assets (Mirakhor, 2010; Iqbal
and Mirakhor, 2011; Chowdhury et al., 2016). In addition, the existence of the risksharing features of equity-based financing is expected to fulfill the principles and
objectives of Shariah.
The risk-sharing instrument seems convincing as an alternative to debt in
corporate financing due to its outstanding features that can serve as a remedy
to debt defaults in the financial system. According to Stiglitz (1989), since risks
are shared between a company and investors through equity-based financing, the
company will not have to scale down its production as much as it would with
debt-based financing when there is economic turbulence. This is because sharing
allows risk to be spread among the contracting parties, mitigating uncertainty,
and thus lowering the risk for individual participants.
Besides, Iqbal and Mirakhor (2011) argue that this risk-sharing instrument
will ensure that the financial resources become readily available to innovators,
entrepreneurs, and small and medium (SME) enterprises by not having to take all
risks on themselves, if not, giving up profitable projects altogether. They further
state that this instrument would also mitigate the asymmetric information problem
which arises when the company’s manager has more information regarding the
company’s overall performance as compared to the investors, whereby there is
a transaction cost along with the cost of monitoring the manager’s activities and
decision on the project to be undertaken. They agree that the risk-sharing contract
is well structured than the debt-based contract as it has the incentive to maximize
both parties’ interests. In this sense, this instrument would be strengthening society
by enhancing cooperation between contracting parties and bringing the company’s
manager and investors closer together. Through this effort of alternative financing,
the companies that fund their projects with more equity-based financing rather
than debt-based financing will find it more bearable for them to sustain in the long
run while maximizing investors’ wealth.
Based on the above remarks, this study highlights the potential of equitybased financing to support companies for long-term financial sustainability. From
the conceptual framework of equity-based over debt-based financing, this study
presents a comprehensive simulation that compares the credit risk exposure of
both types of financing toward the financial sustainability of a company. It can
be seen when a company finance its project with equity-based financing; it was
expected that the equity-based financing can provide minimal credit risk exposure
to the company since the return to investors fluctuates based on the performance

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of the company. Therefore, the company can use the remaining funds of the
project to proceed with its future operation and sustain itself in the long run
while generating more returns for its investors. The feasibility of the equity-based
financing model to promote financial sustainability during the economic crisis is
also examined through the simulation of equity-based and debt-based financing
models across the global financial crisis (GFC) until the Covid-19 phase.
To the best of our knowledge, none have analyzed the potential of equitybased financing to achieve financial sustainability in the context of credit risk
exposure through the Monte Carlo Simulation method. Hence, this study fills the
gap in the existing literature on corporate finance by showing that equity-based
financing is a viable financing alternative for a company to raise capital rather than
solely relying on debt-based financing. This could contribute to the realization the
Islamic finance’s objectives in promoting financial sustainability while stabilizing
the entire economy. Comprehending the ability of equity-based financing in
achieving financial sustainability among market players and the financial market
as a whole could help the management of companies to make a wise decision on
capital financing and also could help investors to assess companies to be invested.
The paper is organized as follows: Section 2 reviews relevant literature, while
Section 3 offers a theoretical discussion of the conceptual framework. Section
4 describes and explains the data and methodology. Section 5 discusses the
simulation results, and Section 6 concludes the paper.
II. LITERATURE REVIEW
Debt-based financing is recognized as the prominent financial instrument in
the global financial system. Even though debt-based financing is said to bring
about a higher probability of default, debt levels are high in the current financial
system. This is due to the tax savings of debt-based financing which make it a
promising financial instrument. According to the trade-off theory, a company
would trade-off between the tax benefits of debt and its bankruptcy costs thus
resulting in the low cost of debt compared to equity (Modigliani & Miller, 1963).
Nevertheless, the GFC in 2007/2008 and the subprime mortgage crisis have
been noted to be due to the risk-shifting behavior of debt-based financing and
excessive leveraging. The risk-shifting problem contributes to the high tendency of
bankruptcy among issuing companies. Due to that, the companies may be unable
to achieve financial sustainability to fund their upcoming projects. Many empirical
studies have discussed the comparison between debt-based financing and equitybased financing in achieving the ultimate objective of a company in fostering
financial sustainability. This goal is significant in determining the continuation
of a company’s operation. Therefore, the literature includes several studies that
compare the ability of debt-based and equity-based financing to maintain the
sustainability of a company during an economic downturn and shed light on the
potential of equity-based financing as an alternative to debt in the financial system.
Many relevant studies have made a comparison between debt-based and
equity-based financing and their roles in financial sustainability. Some studies
have found that increased reliance on debt-based financing might threaten the
sustainability of a company thus affecting the global financial system. To encounter

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this issue, this study highlights prior research that enlightens the benefits of the
risk-sharing feature of equity-based financing for long-term sustainability.
In the current financial system, debt-based financing is still actively used by
market players. However, extensive reliance on debt has negative consequences
on financial health and also economic and societal well-being through occurrences
financial crises such as the 2007/2008 global financial crisis (Chapra, 2008). The
detrimental impact of debt-based financing on the financial system has raised
concern and prompted economic scholars to investigate the most preferred
financing instrument that can contribute to social and economic welfare. A study by
Fianto, Gan, Hu, & Roudaki (2018), which evaluates the impact of debt-based and
equity-based financing by Islamic microfinance in Indonesia on rural households’
welfare, indicates that equity-based financing possesses a more positive impact
on rural household welfare, especially in terms of income changes as compared
to debt-based financing. Employing the double difference-in-difference method, it
supports the idea that equity-based financing with a profit and loss sharing (PLS)
mechanism is the best financing option for customers of Islamic microfinance. This
can be seen when the annual income of customers with equity-based financing
contracts increases higher than that of customers with debt-based financing
contracts. This result is consistent with Dusuki and Abdullah (2006), whereby
they argue that equity-based financing is the ideal financial instrument for Islamic
microfinance since it contrasts sharply with conventional debt-based financing by
embedding the genuine spirit of Islamic finance and religious concepts. Hence,
due to the unique feature of equity-based financing, this current study argues that
the adoption of equity-based financing with the PLS mechanism can promote the
sustainability and effectiveness of Islamic microfinance.
As mentioned previously, the danger of debt-based financing is well
manifested by the global financial crisis (GFC) of 2007/2008 (Meng, Siriwardana,
& McNeill, 2015). Ali (2013), in his study, signifies that the GFC and subsequent
economic collapse in 2008 exacerbated uncertainty and was detrimental to the
global economy. He notes that credit risk has been the biggest threat to financial
institutions following the GFC. Some studies analyze the ability of debt and equitybased financing in reducing credit risk and identifying which financing mode
fosters financial sustainability. Farihana and Rahman (2021) employ a two-step
system generalized method of moments (GMM) technique to investigate whether
the PLS financing mechanism lowers the credit risk of Islamic banks in 16 different
countries. By using Value at risk (VaR) as a measure of credit risk, the finding from
this study indicates that the PLS financing instrument reduces the credit risk of
an Islamic bank. This is because the PLS financing brings banks and customers
together without the involvement of interest-based financing. Therefore, this
strategy allows the banks to improve business performance while lowering credit
risk by addressing moral hazards and asymmetric information. Alandejani and
Asutay (2017) agree that banks are exposed to higher credit risk when they are
offering debt-based financing rather than equity-based financing. This problem
arises when banks rely more on debt-based financing or provide unbalance ratio
between debt-based and equity-based financing. In contrast, Misman, Ahmad,
Khairani, & Amran (2020) in their study contend that equity-based financing
carries higher credit risk in 15 full-fledged Islamic banks in Malaysia compared to

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debt-based financing. Banks with higher equity-based financing tend to engage in
risky projects as they consider that they have enough capital to mitigate any losses
that the banks may incur. This condition will then cause the banks to be prone to
financial instability and bankruptcy.
The arguments above demonstrate that the GFC of 2007/2008 had a significant
economic impact, and its consequences are still rumbling globally (Askari &
Mirakhor, 2014). The GFC has prompted regulators to restructure the financial
system to reduce its vulnerability. Some of these attempts aim at preventing or
limiting debt-based activity while urging that transactions be based on the risksharing system of equity-based financing (Hamzah et al., 2018b). The economists
in the Kuala Lumpur Declaration (2012) argue that the risk-sharing system is the
best instrument to address financial vulnerability, as in the GFC of 2007/2008. They
emphasize the danger of the risk-shifting feature of debt-based financing and the
risk-sharing system’s significance in preventing risk-shifting behavior. Bacha,
Mirakhor & Askari (2015) agree that the risk-sharing system of equity-based
financing might be the best instrument for addressing the recurring problem of
modern economies and the increasingly detrimental consequences of the financial
crisis. Concerning that, Hanim Kamil et al. (2010) discuss in their study the
ability of conventional and Islamic financial principles to uphold effective capital
allocation and financial stability in light of Islamic securitization through Sukuk.
From this study, they argue that Sukuk with a risk-sharing behavior is a potential
source of financing that could assist in the stabilization of the securities market
and provide a remedy for the subprime mortgage crisis.
Besides acknowledging the risk-sharing benefit of equity-based financing,
the current financial system also upholds concern about its sustainability during
any economic event. The financial system is said to be in a stable condition when
there is no excessive volatility, pressure, or crisis that can hamper economic
activity and lower economic welfare (Gadanecz and Jayaram, 2009). In the current
environment, managers and investors realize that financial sustainability is needed
by a company to be able to sustain itself in the long run. From this perspective,
financial sustainability can be achieved when the company is resilient and able
to absorb shocks and the unwinding of financial imbalances. To achieve financial
sustainability, a company must broaden its attention beyond maximizing investors’
short-term return by taking into account how its operations will affect the interests
of all stakeholders, including the community, environment, and society (Freeman,
1984). As stated by Toronto Stock Exchange (2014), there are several benefits that
a company can enjoy through financial sustainability, which are the production of
sustainable profits, improved reputation and regulatory approvals, and increased
employee loyalty and productivity. Other than that, Cheng, Ioannou, & Serafeim
(2014) show that employing sustainable business strategies raises a company’s
value and lowers the cost of equity financing.
Most of researchers argue that equity-based financing with a risk-sharing
feature is the most suitable financial instrument that can contribute to the realization
of the long-term sustainability of a company. For example, Scarlata and Alemany
(2010) examine a new funding model known as philanthropic venture capital
(PhVC) for social enterprises, whereby this financing option uses equity-based
financing as their financial instrument in the deal structuring phase. This PhVC

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financing model provides capital and value-added services to social enterprises
and it focuses on the maximization of social return on the investment. Through
the generation and maximization of social return from the investment, the social
enterprises will be able to grow, become self-sustaining, and hence survive over
the long run. This will then contribute to the achievement of growth and financial
sustainability of the social enterprises through the allocation of capital as well as
value-added activities that support the businesses on a strategic and managerial
level. John (2007) further notes that PhVCs are increasingly using equity as their
financing tool for their primary purpose to develop long-term social value, and
increased mission impact, and sustainability in Europe’s financial services industry.
On the other hand, a study by Al Amosh, Khatib, Alkurdi, & Bazhair (2022) that
explores the impact of capital financing on sustainability performance in terms of
environmental, social, and governance (ESG) among Jordanian companies, reveals
that debt-based financing is the most preferred financial instrument that improves
ESG performance in all aspects of the companies as compared to equity-based
financing. In this respect, the companies’ managers are attempting to minimize
agency costs by engaging in ESG activities. The authors further mention that
the companies are putting more emphasis on debt-based financing rather than
equity to achieve their financial and non-financial objectives. This is because new
shareholders’ opportunism will probably force them to prioritize increasing their
wealth at the expense of other stakeholders, which will negatively impact the ESG
performance of the companies. As a result, shareholder control is restricted by
debt-based financing.
From the survey of relevant literature, it is evident that many studies have
been carried out regarding the debt-based and equity-based financing ability to
contribute to the sustainability of a company and the economy as a whole. Having
said that, the reviewed studies provide mixed results. This study, however,
focuses on the potential of equity-based financing in the financial system despite
financial shocks, which has led to the achievement of the financial sustainability of
a company. Financial sustainability can be achieved when a company can survive
in the long run with fewer or no financial obligations through the issuance of
equity-based financing. Therefore, this long-term financial sustainability enables
a company to generate more profits in the future and thus increase shareholders’
wealth.
Despite the significant importance of this area, documented studies that explore
the financial sustainability of a company in utilizing equity-based financing are still
limited, except for the recent study done by Maikabara, Maulida, & Aderemi (2021).
This particular study explores the best financing modes between debt-based and
equity-based financing that can contribute to the efficiency of the Islamic financial
system to achieve socio-economic development. Nevertheless, their study is a
theoretical exploration based on a literature to compare the nature of equity-based
and debt-based financing models that can contribute better to the effectiveness of
the Islamic financial system. Findings from this particular study explain the need
to deviate from debt-based financing due to its possibility of increasing credit
risk and thus contributing to financial collapse. Through awareness, economists
and market regulators have agreed that the financial system needs equity-based
instruments to remain stable. Hence, this study comes out with a conceptual

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framework of equity-based over debt-based financing to demonstrate the ability of
equity-based financing in achieving financial sustainability and further examines
the feasibility of equity-based financing through the empirical simulation that
compares credit risk exposure between debt-based and equity-based financing.
III. CONCEPTUAL FRAMEWORK
To enhance the understanding of the concept of equity-based financing, this part
develops a conceptual framework of equity-based financing over debt-based
financing. The framework is useful in guiding future research on capital financing
decisions from the perspective of the financing sources. In specific, the conceptual
framework in Figure 1 demonstrates the potential of equity-based financing to
achieve financial sustainability among companies and investors.
Debt Over Equity Financing

Debt Financing Disadvantages

Trade Off
Theory

Tax saving
benefits

Pecking Order
Theory

Seniority claim

Coft of Capital

Minimal cost
than equity

Interest burden

High cost of
borrowing

Credit risk

High
probability of
financial

Risk shifting

High tendency
of bankruptcy

Equity-Based Financing
Risk-sharing
Non-interest based system
Profit and loss sharing
Residual claim approach
State contingent

Financial
Sustainability

Figure 1.
Conceptual Framework of Equity-based Financing over Debt-based Financing

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The debt over equity-based financing is based on various factors. The first
factor is the tax savings benefits of debt-based financing, whereby interest
payment on a debt is deductible as a tax expense (Iqbal, Llewellyn, & Wilson,
2013). When issuing debt-based financing, it could lower the corporate tax of a
company since tax helps reduce interest accruable (Langedijk et al., 2014). Berk,
DeMarzo, & Harford (2018) further explain that by using debt, a company may
be able to reduce its taxable income and therefore decrease its total tax payments.
Thus, this situation could increase the total cash flow available to all investors,
increasing the company’s value. However, if the company cannot be certain that
it will benefit from the interest tax shield, the tax savings benefit of additional
debt will shrink and eventually disappear. When the present value of tax savings
from additional borrowing is just compensated by increasing the present value of
distress costs, the theoretical optimum is obtained. This is referred as the capital
structure trade-off theory (Brealey, Myers, & Allen, 2013).
The second factor that causes many to choose debt over equity-based financing
is the seniority claim of debt through the pecking order theory (Corporate Finance
Institute, 2015). Based on the pecking order theory, managers prefer to fund
investments via retained earnings, followed by debt, with equity only used as
the last option (Agliardi, Agliardi, & Spanjers, 2016). A company tends to follow
this hierarchy of financing options usually due to the problems of information
asymmetries and transaction costs (Myers & Majluf, 1984). According to
asymmetric information theory, a company’s manager possesses more information
regarding the company’s performance, risk, and future outlook than the outsiders
like debtholders and equity holders (Corporate Finance Institute, 2015). Since
debtholders and equity holders have less information about a company than
managers, a bigger return is demanded when a company finances an investment
opportunity with external financing to compensate for higher risk due to
information asymmetry. Managers favor debt over equity in external financing
because debt has a lower cost of capital than equity.
From the investors’ perspectives, investors opt for debt-based financing due to
the reason that debts are loans taken from the investors. Hence, the company needs
to repay the debts in priority before making any payments to its equity holders
(Anjali, 2020). This is because, through the issuance of debt-based financing, the
company is liable to pay a fixed payment of interest and principal amount to the
investors at the end of the loan tenure regardless of the return of the company’s
project (Siddiqui, 2008). On the other hand, equity holders are the last to receive
any residuals at the time of liquidation because they are the company’s owners
(Anjali, 2020). Thus, this theory shows that debt has a higher level of seniority
claim than equity in corporate financing.
The last factor of debt preference is that cost of debt is lower than the cost
of equity. Companies consider the cost of capital between debt and equity-based
financing since it could influence their profitability. Several prior studies argue that
the cost of debt is lower than the cost of equity (Brealey et al., 2013; Smythe, 2015).
Smythe (2015) explains the reason behind this is that the cost of debt is finite. Once
the loan is fully repaid, the company is free from its obligations. Therefore, debt is
usually less expensive than equity for profitable companies. The more prosperous
a company will be, the more expensive it is to give up the equity because it is better
for the company to keep the profits and pay interest.

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While debt-based financing has these advantages, it also has many
disadvantages, as presented in Figure 1. Higher issuance of debt-based financing
tends to increase the interest burden for a borrower, resulting higher cost of debt as
more debt equates to higher interest payments (Corporate Finance Institute, 2015).
The borrower will need to pay a higher payment of interest with the additional
borrowing regardless of the outcome of the project (Kayed, 2012). Chatterjee and
Eyigungor (2015) mention that when debt is in the long-term, a borrower acting at
their discretion will opt to overlook the negative impact of additional borrowing
on the value of outstanding debt. Consequently, the borrower will borrow
excessively and default frequently. In turn, long-term debt becomes expensive,
and the borrower suffers welfare losses as a result of this so-called debt dilution
problem. This shows that the cost of debt will exceed the cost of equity (Corporate
Finance Institute, 2015).
As mentioned previously, higher issuance of debt leads to higher payment of
interest. In other words, higher interest payments may burden the company to
repay its debt. This situation leads to higher credit risk exposure for the company
since it may be unable to settle its financial obligations to the investors. This
problem might have threatened the overall soundness of the financial system and
led to a financial crisis (Hamzah et al., 2018a). The failure of one company can have
a powerful contagious effect on others even if the companies are in good condition
(Ali, 2013). Hence, the accumulation of companies’ failures tends to increase the
probability of a financial crisis (Gulati, Goswami, & Kumar, 2019).
Other than the above-mentioned debt financing disadvantages, debt-based
financing also incorporates risk-shifting problems among the market players. This
risk-shifting problem becomes even worse during the company’s financial distress.
Due to this agency problem, the company has a high probability of bankruptcy.
Hence, a company should take into consideration all these three mentioned debtbased financing disadvantages when deciding on issuing financing. Overall,
debt is typically less expensive than equity, but this is not always the case and
financing choices will also be determined by the company’s financial soundness
and conditions.
The framework in Figure 1 also highlights the outstanding features of
equity-based financing to achieve financial sustainability. This study argues that
financing a company’s project with equity-based financing seems convincing by
combining the justifications for the preference of debt over equity and the debtbased financing disadvantages with the salient features of equity-based financing
itself. Equity-based financing is a non-interest-based system incorporating risksharing, profit and loss sharing, residual claim approach, and state-contingent
properties. According to the economists in Kuala Lumpur Declaration (2012), risksharing is the best alternative to the current interest-based debt financing regime
that pushed the entire globe to the brink of financial collapse. This argument arises
after the economists acknowledge that the financial crisis of 2008 underlined the
fact that the most prominent aspect of the prevailing conventional financial system
is the risk-shifting from financial institutions to customers, governments, and the
public.
In addition, Shari’ah members emphasize risk-sharing as a distinguishing
feature of Islamic financial transactions. As stated by Bacha et al. (2015), using

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a risk-sharing instrument, the financier must share the underlying business risk.
As a result, while an expected return can be calculated, a risk-sharing instrument
cannot provide fixed or guaranteed returns. The returns would differ depending
on the outcome of the business. Since the returns are conditional on the success
of an investment project, they are referred to as ‘state-contingent.’ Risk-sharing
finance has various advantages, including the ability to reduce, if not eliminate,
the world’s debt-induced financial crisis (Bacha et al., 2015).
Furthermore, the profit and loss sharing concept in equity-based financing is
based on an idea of partnership, with banks and customers working together as
business partners (Farihana and Rahman, 2021). Warde (2000) indicates in his study
that profit and loss sharing, in theory, lowers credit risk. However, it necessitates
the bank’s direct participation in investment projects with partners (customers).
Because the return on investment is uncertain, the Islamic bank puts extra effort as
a partner to ensure that a project succeeds. Besides, Li and Lin (2020) mention that
all equity holders have residual claims on the assets of a company after completing
all other commitments. Since equity holders are residual claimants and have
direct control of the business, companies that use equity finance can improve their
performance (Caroline & Willy, 2015).
Based on all of the above-mentioned features of equity-based financing, this
study argues that the issuance of equity may lead to the achievement of financial
sustainability among market players and the financial system. The ability of equitybased financing in fostering financial sustainability can be seen clearly through
the concepts of risk-sharing and profit and loss sharing among the contracting
parties. The returns to investors through the issuance of equity are based on the
performance of the project. If the project is successful, then the investors and the
company will receive the pre-agreed profit-sharing ratio. However, if the project is
unsuccessful and the company has a negative return, the company is not obliged
to pay the returns to the investors since they are sharing the losses of the project.
Hence, this situation leads to lower credit risk exposure for the company and
enables it to use the remaining funds for its future operations. When the company
can sustain itself in the long run, it becomes an incentive for the company to
continue generating more profits for the investors. Through this, the company was
said to achieve financial sustainability. The sustainability of individuals and the
economy can also be seen when the company can pay salaries continuously to its
employees.
To sum up, the discussion based on the conceptual framework has argued
that equity-based financing is the better alternative as it could promote long-term
sustainability for the market players and the economy as a whole. Hence, this
might be useful to convince market players to finance more with equity rather
than just focusing on debt-based financing.
IV. METHODOLOGY
4.1. Data
Based on the conceptual framework in the preceding section, this study runs
the risk and return analysis by simulating capital financing via equity-based
and debt-based models and comparing their credit risk exposure. The Monte

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Financial Sustainability of a Firm: Debt-based or Equity-based Financing to Pursue?

Carlo Simulation method is employed to examine the feasibility of equity-based
financing to achieve financial sustainability. For illustrative purposes, this study
simulates equity-based and debt-based financing models with credit risk exposure
using the market price indices from 4 sectors: construction, consumer product,
finance, and industrial product. The data are from Thomson Reuters and cover the
period from 2007 to 2021, or from the GFC period to the Covid-19 period.
This study uses the price index of each sector as a benchmark against which
to simulate credit risk exposure of debt or equity-based financing. The 4 sectors
selected for the analysis are those highly impacted during the GFC and Covid-19
crisis. From the data collected, we compute the mean returns and their standard
deviations as a basis for the analysis.
4.2. Model Development
After computing the mean returns and standard deviations, this study continues
by identifying the risk and return of both debt-based and equity-based financing
models. It is done by simulating credit risk exposure between both financing
models. This simulation follows the assumptions on the identification of risk
and return for debt-based and equity-based financing models, which have been
summarized as follows:
Table 1.
Summary of Risk and Return Identification of Financing Models
Model

Return to Investor

Return to Company

Model 1
(debt-based financing)

Fixed Return

Residual of the profit

Model 2
(equity-based financing)

Profit sharing ratio

Profit sharing ratio

Risks
The company is
not able to meet the
fixed payment to the
investor.
The company is
not able to gain
confidence from the
investor to invest in
the project.

Source: Author’s assumptions

Table 1 identifies the possible risk and return of the financing models. In
Model 1, there is a possibility that the company cannot meet the fixed obligation
to the investor. Model 2 faces the risk of not getting investors who are willing to
give up their fixed return and secured capital. Based on the risks identified above,
this study reviews that Model 1 may heighten the company’s credit risk exposure.
However, this is not the case with Model 2. Even though the trade-off theory may
favor debt-based financing in many cases, the long-term excessive credit risk
exposure may cause the company to experience financial distress and bankruptcy.
Besides, high credit risk may cause a company to be unable to sustain itself during
a financial crisis. With this view, this study does a simulation to explain the credit
risk exposure between debt-based and equity-based financing models.

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211

For robustness check, this study conducts several additional tests using different
sample data of the 4 sectors through the simulation of credit risk exposure of debtbased and equity-based financing models to check whether the different sectors
are properly identified and fit intuition with the observation period. Particularly,
this simulation aims at examining the feasibility of an equity-based financing
model to achieve financial sustainability during the GFC until the Covid-19 phase.
To set up the simulation, this study considers companies in each of the 4
sectors that wish to raise capital via debt (bonds) or equity to finance a project
that costs RM1,000,000. To differentiate between equity-based financing and debtbased financing for each sector, this study uses the following data:
Table 2.
Financing Details for 4 Selected Sectors
Debt-Based Financing
Capital required = RM1,000,000
Coupon payment = 5% = RM50,000
Duration:
15 years (2007-2021, GFC until Covid-19)
Payment frequency = Annually

Equity-Based Financing
Capital required = RM1,000,000
Coupon payment = flexible (no return if no profit
is generated)
Sharing ratio = 70% investors, 30% company
Duration:
15 years (2007-2021, GFC until Covid-19)
Payment frequency = Annually

Source: Author’s assumptions

Table 2 uses a few parameters to simulate the capital financing of a company
in each sector. For the simulation, this study assumes that the company would like
to raise RM1,000,000 to finance its project. The company has two options, either to
raise the capital via debt-based financing (such as bonds) or equity-based financing
(return based on the company’s performance). As for debt-based financing, i.e. the
first option, the company guarantees that the investors will receive an annual 5%
coupon payment. In this case, the investors will get a fixed payment of RM50,000
annually. The debt also will mature in 15 years, coinciding the duration from the
GFC to the Covid-19 period. Then, the investors will receive the invested amount
(guaranteed capital) of RM1,000,000 at the end of the debt tenure.
As for the second option, the company can raise capital via equity-based
financing. This type of financing is similar to venture capital, in which the return
is based on the performance of the project. The return also will be shared between
the company and the investors based on the pre-agreed ratio. In this simulation,
the ratio is 70% for the investors and 30% for the companies. In case the project
cannot generate any profit, the investors will not receive any return. Hence, in this
sense, the investors are sharing the risk of the project with the company. Using
all the parameters, this study compares the return and risk of the two financing
options. Through the objective, this study uses mean (return) and standard
deviation (risk) data from the 4 sectors to generate annual returns of 15 years from
the GFC to Covid-19 via 5000 iterations of Monte Carlo Simulation. The order
of the procedures that the equity-based and debt-based financing models follow
during the simulation is shown in Figure 2:

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Financial Sustainability of a Firm: Debt-based or Equity-based Financing to Pursue?

Collect historical price index of each sectors
Calculate Mean

Calculate Standard Deviation

Set the parameters fot the financing
Capital

Frequency

Duration

Method (Debt
or Equity)

Return Sharing
(Equity)

Coupon (Debt)

Set parameters for Monte Carlo Simulation
Number of iterations

Outcome
Total return to
companies and investors

Frequency of no
return generated from
the project

Frequency of negative
NPV (negative value
project)

Frequency of default
(measure credit risk
exposure)

Source: Author’s illustrations

Figure 2.
Monte Carlo Simulation Process for 4 Selected Sectors

Based on Figure 2, this study is expected to provide the outcome on the
possible returns to companies in each sector and the investors. The outcome also
includes the frequency of producing a negative net present value (NPV) of the
project and the possibility of default occurrence. Based on the default frequency,
this study elaborates on the credit risk exposure of the companies. The outcome
has been produced for each method of financing, which is debt-based and equitybased financing. This study expects that the equity-based model would be able to
promote financial sustainability in the long run.
4.3. Model Assumptions
Both debt-based and equity-based financing are used to conduct the Monte Carlo
simulation. All parameters for these models are set fixed. In addition, there is no
intervention by the government and monetary authorities. Hence, it is assumed
that there is no monetary policy that can affect the internal operation of the project.
Payment frequency for both debt-based and equity-based financing models is
similar in the sense that the company pays an annual return to the investors. The
annual return is continuously paid to the investors through debt-based financing,
regardless of any economic condition during the observation period. However,
the annual return pays to the investors through equity-based financing is based on
the company’s performance.
The company in each of the 4 selected sectors - construction, finance, consumer
product, and industrial product - have fixed and different percentage of means

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213

and standard deviations which represents their return and risk. These 4 sectors
are grouped into low and high project performance based on their return levels.
Negative return frequency as one of the parameters analyzed in this simulation
measures the possibility of no return generated from the project. Meanwhile,
negative net present value (NPV) frequency measures the profitability of a project
and represents the possibility of paying a negative return to investors.
Credit risk exposure is measured by the percentage of default exposure of each
financing model. If the company in each sector recorded a higher level of default
exposure frequency, the company is most likely exposed to high credit risk. The
company may default if it fails to achieve the sustainability condition set by the
model.
V. RESULTS AND ANALYSIS
5.1. Simulation of Equity-based and Debt-based Financing Models
This part discusses the findings from the simulation of credit risk exposure of debtbased and equity-based financing models for the companies from 4 sectors. By
using the financial data of the 4 selected sectors over 15 years from 2007 to 2021, the
simulation runs through the GFC crisis and COVID-19 and enable investigating the
ability of the equity-based financing model to maintain the financial sustainability
of the companies during the economic downturn. The analysis is separated into
two groups, which are sectors with low project performance (return of below 1%)
and sectors with high project performance (return of 1% and above). The return act
as a profitability benchmark for each sector.
Tables 3 and 4 offer the risk and return analysis of debt-based and equitybased financing for low project performance with the following mean returns and
risks (standard deviation):
• a return of 0.16% and a risk of 7% for the construction sector
• a return of 0.43% and a risk of 5% for the finance sector
In debt-based financing, regardless of return, the companies in each sector
need to pay a fixed return of RM50,000 annually to the investors. In other words,
even though the companies are facing low project performance, they still need to
pay a fixed pre-determined return to the investors since the issuance of debt-based
financing incurs regular payment of interest. If there are any remaining profits
from the project, the companies will get their share eventually. It means that
the companies are obliged to settle their obligations before they can get benefits
from the project. In other words, the management of the companies is entitled
to the residual cash flows in the form of dividends or retained earnings after all
obligations have been met (Cai, Yang & Zhao, 2017; Li & Lin, 2020). This situation
contributes to a negative return of 100% to the companies as denoted in both
Tables 3 and 4. Since these two sectors have low performance, i.e. their returns do
not exceed 1%.
On another note, the companies have a high possibility of negative returns
because they still need to pay a fixed return to the investors even with low project
performance. Thus, low performance and fixed pre-determined return payments
to investors in debt-based financing contribute to a high default exposure of 100%
within 15 years. In other words, companies with low profitability and obligated to

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Financial Sustainability of a Firm: Debt-based or Equity-based Financing to Pursue?

pay a fixed return to investors through debt issuance would expose the companies
to high credit risk. As mentioned by Hackbarth, Miao, & Morellec (2006), companies
tend to default on their debt obligations, thus giving rise to companies’ credit
risk. When the companies default, they may not be able to sustain themselves in
the long run, or even worse, they may face bankruptcy. This result is consistent
with the findings of Alandejani and Asutay (2017), whereby banks that offer debtbased financing are exposed to high credit risk as those relying on equity-based
financing.
Nevertheless, if the companies survive the 15 years, the investors may reap
profits as a result of the project’s positive NPV (negative NPV frequency of 0%)
since the return to investors is guaranteed. These guaranteed returns have made
debt-based financing more favorable as compared to equity-based financing since
it can minimize the risk profile of the investors (Mohd Jaffar, 2010). In addition,
by issuing debt-based financing, investors will have the priority claim if the
companies go bankrupt. This is explained in the pecking order theory, whereby
investors will have a seniority claim to assets when issuing debt-based financing,
thus making equity-based financing to be more expensive (U.S Securities and
Exchange Commission, 2009). Seniority takes the form of the order of repayment
in the event of companies’ default in which investors are entitled to full repayment
before equity holders can be paid anything, considering the absolute priority rule
(Schlegl, Trebesch, & Wright, 2019).
Table 3.
Risk and Return Analysis for the Construction Sector

Year

Debt-based financing
Return = 0.16%, Risk = 7%
Annual Return to Return to
Return Investors Company

1
18800
50000
2
17400
50000
3
28100
50000
4
23800
50000
5
19600
50000
6
33000
50000
7
17400
50000
8
34300
50000
9
26500
50000
10
30000
50000
11
22900
50000
12
21000
50000
13
18900
50000
14
33500
50000
15
18800
50000
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

-31204
-32623
-21921
-26187
-30408
-16964
-32578
-15684
-23509
-20031
-27144
-29036
-31104
-16527
-39222
100%
0%
100%

Equity-based financing
Return = 0.16%, Risk = 7%
Annual
Return to
Return to
Return
Investors
Company
3100
2147
25600
17948
14600
10236
13700
9596
25300
17741
34600
24187
31600
22126
13800
9676
30000
20972
22700
15877
25700
17969
34300
24006
20400
14300
24500
17145
19400
13549
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

920
7692
4387
4113
7603
10366
9483
4147
8988
6804
7701
10288
6128
7348
5807
100%
88%
0%

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Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 2, 2023

Table 4.
Risk and Return Analysis for the Finance Sector

Year

Debt-based financing
Return = 0.43%, Risk = 5%
Annual
Return to
Return to
Return
Investors
Company

1
25600
50000
2
18100
50000
3
13200
50000
4
26300
50000
5
23400
50000
6
9600
50000
7
24200
50000
8
14100
50000
9
26800
50000
10
16700
50000
11
32900
50000
12
20100
50000
13
8000
50000
14
17100
50000
15
9400
50000
Frequency of negative return
Frequency of Negative NPV
Frequency of default exposure

-24416
-31912
-36795
-23670
-26623
-40352
-25815
-35915
-23218
-33263
-17147
-29875
-41996
-32908
-40581
100%
0%
100%

Equity-based financing
Return = 0.43%, Risk = 5%
Annual
Return to
Return to
Return
Investors
Company
10800
7572
25300
17679
15300
10710
20400
14282
25800
18045
12000
8428
12900
8999
7800
5450
13900
9723
15200
10612
8800
6128
9600
6709
17800
12464
10200
7142
16600
11635
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

3245
7577
4590
6121
7734
3612
3857
2336
4167
4548
2626
2875
5342
3061
4987
100%
100%
0%

Tables 5 and 6 offer the risk and return analysis of debt-based and equitybased financing for high project performance with the following mean returns and
risks (standard deviation) respectively for:
• a return of 1% and a risk of 4% for the consumer product sector
• a return of 1% and a risk of 5% for industrial product
As in debt-based financing, the companies in this group sector also need to
pay a fixed return of RM50,000 to the investors. Even though the companies are
performing better than the previous group sectors, they still need to pay that fixed
pre-determined return to the investors since the issuance of debt-based financing
incurs the regular interest payment regardless of the company’s performance.
These interest payments would become a burden for the companies to repay
the investors as it was set fixed at the beginning of the project. The higher the
interest payment, the higher the borrowing costs of the companies and hence
the more reluctant the companies to pay back their loan obligations (Anwar,
Mansor, Shamsudin, & Mohd Fatzel, 2020). If there are any remaining profits from
the project, the companies will also get their share eventually. It means that the
companies are obliged to settle their obligations before getting any project benefits.
The cost of debt is finite. Once the loan is fully repaid, the companies are free from
any obligations. This is a reason why good-performing companies would choose
to issue debt rather than equity since debt is usually less expensive than equity for
profitable companies.

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Financial Sustainability of a Firm: Debt-based or Equity-based Financing to Pursue?

Regardless of good performance, the companies in this group sector are still
exposed to bad economic conditions during the observation period. For example,
the GFC and Covid-19 have adversely affected the financial system and brought the
economy to the edge of collapse. To support this view, Botta (2020) demonstrates
in his study that the capital structure of their sample companies has a major realworld impact during the GFC. The companies with higher leverage report lower
capital expense and lower returns which thus cause them to spend less and reduce
investment, resulting in lower future earnings. This shows that excessive debt
issues severely impact corporate investments, and the impact is worse during the
crisis period.
The intensification of the GFC has resulted in great economic and financial
difficulties. As for this study, the greater exposure to downturns during the
financial crisis contributes to a negative return of 100% to the companies in both
the consumer product and industrial product sectors as denoted in Tables 5 and 6.
The companies have a high possibility of negative returns because they still need
to pay a fixed return to investors even during financial distress. Thus, operating
in a bad economy and paying fixed pre-determined returns through debt-based
financing contribute to a high default exposure of 100% within 15 years of both
sectors’ operations. This shows that the companies in both sectors are exposed
to high credit risk during the crisis phase. This result is similar to what has been
found by Ali (2013) whereby he argues that credit risk is the main threat to financial
institutions during the global financial crisis. The high default exposure will
eventually reduce the companies’ value and result in poor performance (Ali, 2013).
If the companies default, they may not be able to sustain themselves in the long
run to continue their future operations, or even worse, they may face bankruptcy.
This condition can also lead to financial distress of other contracting parties like
investors and equity holders. Hence, this cascading effect can cause clustering of
defaults among these market players, thus inducing economic collapse (Li & Lin,
2020).
However, if the companies survive the 15 years, the investors may reap profits
as a result of the project’s positive NPV since the return is guaranteed through
debt issuance. Additionally, investors will have the priority claim if the companies
in each sector go bankrupt during the observation period. The guaranteed return
and priority claim are among the reason why debt-based financing is preferable as
a financing instrument among market players and the increase in the preference
for debt-based financing has dampened the effort of introducing the risk-sharing
feature of equity-based financing into the financial system.

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Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 2, 2023

Table 5.
Risk and Return Analysis for the Consumer Product Sector

Year

Debt-based financing
Return = 1%, Risk = 4%
Annual
Return to
Return to
Return
Investors
Company

1
17300
50000
2
16600
50000
3
13400
50000
4
12700
50000
5
19200
50000
6
17400
50000
7
21000
50000
8
17300
50000
9
15000
50000
10
15200
50000
11
14500
50000
12
14000
50000
13
6700
50000
14
25400
50000
15
15400
50000
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

-32661
-33425
-36555
-37311
-30837
-32610
-28973
-32678
-34997
-34760
-35500
-36001
-43298
-24585
-34563
100%
0%
100%

Equity-based financing
Return = 1%, Risk = 4%
Annual
Return to
Return to
Return
Investors
Company

8400
2508
12600
3778
29900
8981
12700
3802
26700
7998
16100
4840
7700
2322
7100
2127
19700
5908
11600
3471
22500
6736
9000
2693
28000
8414
24300
7288
12200
3661
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

5682
8310
19177
7881
16098
9458
4405
3918
10565
750120
13167
7057
19484
13756
10617
100%
100%
0%

Table 6.
Risk and Return Analysis for the Industrial Product Sector

Year

Debt-based financing
Return = 1%, Risk = 5%
Annual
Return to
Return to
Return
Investors
Company

1
11000
50000
2
31100
50000
3
8500
50000
4
18400
50000
5
31800
50000
6
26900
50000
7
5000
50000
8
13100
50000
9
21600
50000
10
24400
50000
11
23200
50000
12
23200
50000
13
21700
50000
14
7000
50000
15
24100
50000
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

-39012
-18854
-41530
-31554
-18186
-23083
-45038
-36920
-28374
-25577
-26771
-26817
-28277
-43048
-25944
100%
0%
100%

Equity-based financing
Return = 1%, Risk = 5%
Annual
Return to
Return to
Return
Investors
Company
20300
14182
20000
13970
20500
14336
25700
18007
17000
11899
26000
18175
21900
15318
19800
13842
18800
13130
17600
12329
18400
12861
15400
10776
18300
12815
20300
14217
1600
1095
Frequency of negative return
Frequency of negative NPV
Frequency of default exposure

6078
5987
6144
7717
5099
7789
6565
5932
5627
5284
5512
4618
5492
6093
469
100%
99%
0%

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Financial Sustainability of a Firm: Debt-based or Equity-based Financing to Pursue?

For equity-based financing, the return to the investors varies based on the
performance of the companies in each sector. If the companies are performing
well, investors will get higher returns from the project. However, if the project is
unsuccessful, the companies are not required to pay a fixed return to the investors.
Since the returns are conditional on the project’s performance, the returns are
referred to as state-contingent (Bacha et al., 2015).
As shown in Tables 3 and 4, the lower return from the analysis shown by each
sector indicates that the companies have a high possibility of getting negative
returns. However, the investors will not receive a return since the companies have
negative returns and the companies are not obliged to repay the investors. This
is because the investors and the companies are practicing profit and loss sharing
of the projects. This situation results in 0% default exposure regardless of the
returns and risks to the companies because the returns are adjusted to match the
company’s performance. It clearly shows that the profit and loss sharing concept
of equity is useful in minimizing companies’ credit risk. With no financial costs
or obligations from the equity issuance, the companies can retain control of their
business and thus induce them to use the remaining funds to finance more projects
in the future whilst maximizing investors’ wealth. Therefore, the companies will
be able to sustain themselves in the future thus achieving financial sustainability.
Farihana & Rahman (2021) support this finding whereby they find that the Profit
and Loss Sharing (PLS) instrument of equity-based financing reduces the credit
risk of banks in 16 different countries which thus allows the banks to improve their
business performance.
On the other hand, equity-based financing could also contribute to the project’s
negative NPV of almost 100%, as seen in Tables 3 and 4 since the companies in
these sectors possess low project performance. Similar to those in Tables 5 and
6, the possible negative project NPV within the 15-year trajectory is reaching
100%. These situations make sense since the flexibility of return from equity-based
financing might lead to negative returns for investors, especially for companies
with low project performance. When there is no profit generated from the project,
there will be no return paid to the investors, indicating the flexible return practice
of equity-based financing.
Yet, through the issuance of equity-based financing, this analysis demonstrates
that the companies in each sector can achieve financial sustainability. This is due
to zero default exposure recorded by the companies in each sector during the
observation period of this study as compared to the debt-based financing which
recorded 100% default exposure by all sample sectors. Hence, this condition shows
that the companies remain stable when issuing equity-based financing regardless
of financial shocks hitting them. This finding is consistent with the study by
Maikabara et al. (2021). They find that equity-based financing can contribute to the
Islamic financial system’s efficiency and sustainability in ensuring socioeconomic
development. They also argue that equity-based financing demonstrates the
effectiveness of the Islamic financial system in achieving Shariah’s objectives.
Therefore, the finding of this study seems significant in demonstrating the ability
of equity-based financing to achieve long-term sustainability as an alternative to
debt.

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219

VI. CONCLUSION
This study has evaluated the best possible alternative financial instrument that
can replace debt as a mode of financing. To this end, this study conducts an
empirical simulation of debt-based and equity-based financing models with credit
risk exposure across the GFC until the Covid-19 phase based on the developed
conceptual framework of equity-based financing over debt-based financing.
Accordingly, this study employs the Monte Carlo Simulation method to analyze the
feasibility of the equity-based financing model in achieving financial sustainability
during the observation period.
From the conceptual framework, we highlight the ability of the risk-sharing
feature of equity-based financing to offer long-term sustainability among the
market players and economy. Subsequently, through the empirical simulation of
credit risk exposure between debt-based and equity-based financing models, this
study finds that equity-based financing is the most reliable and robust financing
instrument since it possesses zero default exposure for all sectors examined and
during financial and health shocks. This can be seen when the company can sustain
itself in the long run without financial hiccups to its operations. This situation is
due to the flexible return practice in equity-based financing where the company
needs not to pay any return or provides a minimal return to investors when the
company is in financial distress. Therefore, this flexibility contributes to minimal
credit risk exposure to the company and enables the company to achieve financial
sustainability through its continuation of operation using the remaining funds
from its project. When the company can sustain itself in the long run, the company
can therefore continuously pay salaries to its employees, increase productivity
in the financial market and hence increase money circulation in the economy
through financial transactions. This shows that equity-based issuance with a risksharing component would be the best alternative to promote social return on top
of financial returns that may become an avenue to differentiate Islamic finance
from conventional finance.
This study deems that more empirical treatments of a risk-sharing feature
of equity-based financing may lead to a greater appreciation of this alternative
financing. Through this effort, the outcome of this study may provide greater
insights to the companies and the investors in deciding the best alternative
financing that can promote long-term sustainability and secure their long-run
risk-return profile. This study also notes the danger of excessive debt issuance to
the financial market and the economy as a whole. Therefore, the findings of this
study can enhance the effort of persuading market players to issue more equitybased financing instead of only focusing on debt-based financing.
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