Volume 9, Nomor 1, Juni 2023
A Concept of Islamic Corporate Financial Management
Diamantin Rohadatul Aisy
Faculty of Islamic Economy and Business, Universitas Islam Negeri Syarif Hidayatullah Jakarta, Indonesia. E-mail: [email protected]
ARTICLE INFO ABSTRACT Keywords:
Corporate Financial Management; Islamic Corporates; Islamic Financial Management
Received:
9 December 2022 Revised:
21 July 2023 Accepted:
25 July 2023
This paper aims to formulate the corporate financial management concept that complied with Islam's principles and values. The methodology used was a critical analysis of the conventional theories of corporate financial management, using normative and conceptual approaches contained in Al-Quran and Hadith. Findings are including the concepts of corporate financial management based on the principles and values of Islam in the form of goal achievement that maximizes corporate value. The scope of Islamic corporate financial management discussed in this research is the financial management process of a corporate that begins when obtaining funding, involves the concept of operational and capital funding alternatives for companies that comply with Sharia principles along with instruments and calculation of the cost of capital, until financial management reporting and its analysis that should recalculate performance of corporate based on Islamic values.
Penelitian ini bertujuan untuk merumuskan konsep pengelolaan keuangan perusahaan yang sesuai dengan prinsip dan nilai Islam. Metodologi yang digunakan adalah analisis kritis terhadap teori konvensional pengelolaan keuangan perusahaan, dengan menggunakan pendekatan normatif dan konseptual yang tertuang dalam Al-Quran dan Hadits. Hasil penelitian meliputi konsep pengelolaan keuangan perusahaan berdasarkan prinsip dan nilai Islam dalam rangka pencapaian tujuan manajemen keuangan, yaitu memaksimalkan nilai perusahaan. Ruang lingkup pengelolaan keuangan perusahaan syariah yang dibahas dalam penelitian ini adalah proses pengelolaan keuangan suatu perusahaan yang dimulai sejak memperoleh pendanaan, meliputi konsep alternatif pendanaan operasional dan modal bagi perusahaan yang memenuhi prinsip syariah beserta instrumen dan perhitungan biaya modal, hingga pelaporan pengelolaan keuangan yang harus disajikan oleh perusahaan dan analisisnya harus memperhitungkan kinerja perusahaan berdasarkan nilai-nilai Islam.
Introduction
The concept of sharia is a concept that has recently started to be used frequently by an entity as its corporate identity. The concept is mainly applied to marketing management systems and amusia resource management in a corporate. However, corporate financial management has not widely applied principles and Islamic values
DOI: http://dx.doi.org/10.31602/iqt.v9i1.9458
that make Sharia corporates different from conventional corporate in the aspect of financial management. Research related to Islamic corporate financial management is also still few, so it also causes a lack of literature on managing its finances by the principles of Sharia. Several previous studies have discussed several topics about Islamic financial management such as the cost of capital and capital structure of Islamic companies, including Ahmed (2007), Nagano (2010), Miglietta & Battisti (2016), and Alzahrani (2018), but these three studies did not discuss the company's financial management as a whole. On the other hand, research that discussed Islamic law and ethical value orientation on Islamic finance conducted by Tohirin (2010), Abdullah (2013), and Hasan (2016), however, did not specifically discuss the concept of Islamic finance for companies. In line with research conducted by Ahmed & Salleh (2016), the concept of Islamic financial planning is only limited to traditional Islamic instruments, zakat, and waqf. Therefore, this research is conducted to be able to distinguish critically the corporate financial management and the common instrument that follows, applied based on the principles and values of Islam, so that later can be a reference for companies that apply the principles of sharia.
The scope of corporate financial management discussed in this research is the financial management process of a corporate that begins when obtaining funding until its financial management reporting. However, there is one fundamental criticism of the practice of Islamic finance, that is the discussion of Islamic finance which should be more directed to the ultimate goal of economic and social goals in a transaction, and not making the contract in the transaction the core of the discussion of Islamic finance (El-Gamal, 2006). Therefore, the discussion of financial management in this study covers the nature of corporate objectives, time value of money, capital structure theory, cost of capital theory, financial instrument, capital budgeting theory, working capital management, and financial report along with its analysis. The purpose of this research is to formulate the concept of financial management of Islamic corporate, starting from the determination of the nature of corporate objectives by Islamic principles and values to other aspects, such as the time value of money; capital structure, and capital costs; corporate financing instruments; capital budgeting;
working capital management; financial statements for the Islamic corporate and its analysis.
Literature Review 1. Nature of Corporate
Brigham and Ehrhardt (2014) explained that a manager must strive to increase the value of his corporate, where the value of the corporate can be determined by the size, time, and risk of free cash flows (FCF). Meanwhile, free cash flows (CFCs) are cash flows available to be distributed to all corporate investors, both shareholders and creditors. So, it can be concluded that one of the goals of financial management is to maximize the intrinsic value of the corporate’s shares.
In line with that thought, Brealey et al. (2011) also state the natural objective of finance approved by almost all shareholders is to maximize the market value of investments held by shareholders in certain companies. A smart and effective manager will decide to increase the value of the corporate stock and shareholder wealth. Increased shareholder wealth, according to Brealey, et al. (2011), will eventually culminate in the fulfillment of any purpose desired by the shareholders.
Stockholders can use their wealth for charity or spend it on luxury. That is, shareholders can then choose between saving their wealth or spending it right now.
Maximizing the wealth of shareholders, according to Brealey, et al. (2011) would be wise if they had access to well-functioning financial markets or financial sectors.
Therefore, shareholders have the flexibility to manage their investment plans or savings, to the decision to withdraw investments from a particular corporate, to increase the market value. This is because essentially stockholders will tend to avoid investment risk or just give a little tolerance to investment risk. The stock owner will try to raise the value of the stock, but at the same time avoid investment with high risk.
2. Time Value of Money
The time value of money explains the concept of the current value of money to be more valuable in the future if the money is invested, so that it will earn interest, and will end up with a larger value of money than ever in the future (Brigham &
Ehrhardt, 2014). Therefore, in the concept of the time value of money, the two values of money, the present value, and the future value, in which the future value is the result of calculating the present value that is influenced by the interest rate, called compounding. In detail, the future value of money can be calculated by the following formula.
= (1 + ) FV = Future Value
PV = Present value I = Interest rate
N = Number of periods analyzed 3. Capital Structure Theory
In the conventional theory of capital structure, three main theories become the foundation of a financial manager in determining the composition of funding for the corporate, among others as follows.
a. The trade-off theory explains the capital structure by considering the profit and cost aspects of debt. Interest rate payments will be deducted from corporate profits as cost, but dividends are not. Thus, by adding debt to the capital structure, the corporate will lower its expected tax liabilities and increase cash flow after tax or corporate profits. This will have an impact on the corporate’s preference for high debt ratios compared to tax advantages (Ahmed, 2007).
b. Signalling theory that explains the choice between debt and capital as funding decisions, which will lead to a different signal to investors. The increasing amount of forest will give a signal that the corporate needs a high cash flow in the future, which means the corporate will provide good debt service.
Meanwhile, for the option to issue shares, the manager will consider based on the stock price over the prevailing market price. When stock prices are above market rates, then if the manager issues shares will move the value of the new investor to the previous shareholders. Conversely, when stock prices fall below market prices, managers will choose debt financing compared to issuing shares.
c. Pecking order theory explained by Myers (2001) is a theory about the preference of corporate for a more cost-secure funding model, before arriving at funding options at a high cost. Based on the theory, the corporate will prioritize funding internally first, before funding from external, with consideration of lower capital cost.
4. Cost of Capital Theory
The Weighted Average Cost of Capital (WACC) theory is used to select the minimum rate of return or capital cost in determining funding decisions. The funding options are reconsidered in the choice between debt and capital. The WACC formula describes the weighted average rate of return expected by firms from different combinations of investors and different sources of funds.
= ( ⁄ + ) + ( ⁄ + ) E = Market value of corporate’s equity
D = Market value of corporate’s equity E+D = Market value of corporate
Ke = Cost of equity Kd = Cost of debt 5. Financial Instrument
Ross, et al (2010) classified the types of corporate funding instruments into long- term and short-term financing. Corporate funding with long-term instruments such as issuing shares to the public (IPO), leasing, options, and futures. Option is a contract in the form of rights granted to shareholders to buy and sell assets at a fixed price, before or right on the due date. While funding the corporate by arranging cash management, debt, and inventory management.
6. Capital Budgeting
Capital budgeting or capital budgeting is the whole process of allocating and budgeting corporate capital, especially the allocation of capital into fixed asset purchases (Ross, Westerfield, & Jordan, 2010). Therefore, corporates need to weigh the investment options that exist. Ross, et al. (2010) describes several methods or approaches that can be used to weigh investment options, to make
capital budgeting decisions, such as (1) Net Present Value; (2) The Payback Period Rule; (3) The Discounted Payback Period; (4) The Internal Rate of Return (IRR); (5) The Profitability Index (PI).
7. Working Capital Management
Working capital management is defined by James and John (2009) as the administration or management of the corporate current assets and financing required to support the procurement of the current assets. The basis to be considered in working capital management is the optimal level of investment in current assets, as well as the appropriate combination of long-term and short-term financing, required to support investments in current assets. One of the options for financing the corporate current assets is spontaneous financing, which is to apply accounts payable to rapidly improve the daily operations of the corporate. Another financing option for financing current assets is hedging, which is a method of financing in which each asset will be exchanged for a financing instrument with a certain maturity. The permanent component of a current asset will be financed with long-term debt, while other variations on current assets will be financed with short-term debt.
8. Financial Report
The general financial statements contain reports of whatever happens to assets, revenues, dividends, and cash flows for one period, presented with quantitative data. Basically, according to Brigham and Ehrhardt (2014), there are four types of financial statements, namely balance sheet, income statement, stockholders' equity statement, and cash flow statement. Islamic corporate has different standards for preparing financial reports. Ikatan Akuntan Indonesia (2007) establish a mandatory Islamic corporate to report social activities through the reports on sources and uses of zakat andbenevolence funds.
9. Financial Report Analysis
Financial statement analysis is calculating some important ratios related to the data presented in the financial statements, to review the financial conditions of the corporate. Financial ratios according to Horne & Wachowicz (2009) are the indexes that account for the two accounting numbers and are obtained by dividing the numbers one by another. Kasmir (2014) classified the financial ratios commonly used by firms in Indonesia into four ratios, including liquidity ratios, solvency ratios, activity ratios, and profitability ratios.
Method
This research is a kind of qualitative participatory research with a critical analysis approach. The research method used to answer the questions is the method of critical emancipatory action research. Critical emancipatory research is action research based on critical than interpretative theory (Willis, 2007). Meanwhile, the nature of this research is descriptive research.
The data obtained from the literature study in this study will then be analyzed in two steps. First, the data will be analyzed by the normative legal method of conceptual approach. The conceptual approach is used to identify and understand the basic concepts and principles or principles used in existing Sharia financial management theories, including those used in financial instruments. Once the basic concepts and principles of a theory can be identified, then further assessment of the norms underlying the financial management theory of Sharia companies can be done. The normative rules used in this study refer to Al-Quran and Hadith. Second, the data will be analyzed inductively.
Results and Discussion
1. Islamic Values and Principles in Financial Management
Islamic economics is an economic concept based on the rules of sharia in the Qur'an and Hadith. The verses of the Qur’an descend before the order of human order as it is now, especially in socioeconomics. Several verses of the Qur’an descend to straighten the behavior of deviant society, when Rasulullah SAW, including deviant behavior in the activity of buying and selling or the economy. In addition, the Prophet also helped solve the economic problems that are happening at that time, through his behavior and decisions.
One of the Prophet's teachings on good management is implicitly conveyed to the following Hadith.
"The Prophet said:" Indeed Allah obliges deeds done well in all things, if you kill the animals then do it in a good way, sharpen the cutting tool, then rest the animal's" HR. Muslim: 2615 (Diana, 2012)
In general, the Hadith advises Muslims to do something well. In line with the concept of management, where an activity is done with good planning and done as well as possible, to achieve a goal that provides benefits to the perpetrators.
In addition, more specifically about financial management, some verses of the Qur’an and Hadith regulate economic and commercial in particular, either in the form of prohibitions or orders. Trade-related prohibitions in Islam, among others, prohibit the practice of usury, gharar, and maysir as well as the prohibition of price determination. In addition to the prohibition, Qur’an and Hadith also arrange commerce in the form of suggestions/orders, such as zakat orders, recording transactions owed receivables, and hastening to pay off debt.
2. Nature of Islamic Corporate
The objective of the corporate in the Islamic perspective is to start from the most basic objective of the fulfillment of the maqashid of sharia stated by Chapra (2007), which consists of the five basic human needs protection of religion, soul, descendants, intellect, and property. On the other hand, Metwally (1981) also stated the concept of Islamic corporate objective is to maximize profit at a fair (adl) and reasonable level with the other main objective being doing good to please
Allah. Furthermore, entering the corporate goal in the field of economy is the fulfillment of utility with tautological motives. Utilities based on a tautological framework will direct human desire within the framework of functions and duties as caliphs. So, in the end, the consumer utility that must be met by the corporate is not only related to individual utilities but also related to utilities to fulfill moral obligations, such as meeting the needs for the welfare of the general public. The objectives of the corporate are then drumskin on a single purpose which is falah, which accommodates utilities for all stakeholders. In detail, the formulation of corporate objectives can be seen in Figure 1 below.
Figure 1. Objectives of Islamic corporate
3. Time Value of Money an Islamic Perspective
The discussion of the time value of money is still under debate among scholars and researchers, with each point of view. Such Khan (1991) reviews the time value of money with time preferences contained in the time value of money and allows time preference, as long as it is in non-fixed value and not charged on money. Khir (2013) concludes Khan's opinion that the time preference in Islam may be applied in the context of adding value to goods/services sold in installments. As mentioned earlier, the existence of time preferences in the time value of money is a concept of greater reward from Allah SWT. for people who are willing to postpone today's satisfaction for a greater profit in the future. Therefore, the future is considered more important in Islam and more valuable. In economic terms, this is called a positive time preference where there is an increase in value in the future because the future is considered more valuable than today. This principle is then applied to the sale and purchase transaction with the murabahah agreement.
In addition, Khan (1991) also justifies the time value of money within the expected rate of return, which is used as a consideration in investment decision-making.
However, it should be noted that these considerations should also be followed by consideration of the inherent uncertainty, both time-related and time-related uncertainties. In Zarqa's point of view, project evaluation using a profit rate is a positive one, in the context of efficiency as Islam prohibits the existence of an israf.
The expected rate of return or return reflects the expected return on the investor's willingness to bear the risk. Thus, the time preference found at the rate of return is not due to the increased value of money, but due to the magnitude of the uncertainty borne out over the long period. However, it should be noted also that the time preference in an investment is not required to mean a positive profit. The
possibility of zero negative preference and even negative time preference should also be realized in the investment. So, in the concept of the time value of money approved this, not only based on positive time preference.
In line with that opinion, Zarqa which uses the term "discount method", argues that the permissibility of discount in Islam, lies in the type of investment, whether the type of investment is ribawi or halal. Discounts are only mathematical formulations that are not related to interest, not even the economy.
However, according to Khan, the concept that the present goods are more valuable than the price to come is a myth. Resources that are not being used at the moment and are ready to be invested in the future should not require that the goods currently have more value than the goods to come. This is because the available resources can be unemployed due to the lack of opportunity, or the occurrence of opportunities that are expected to produce even breakeven even loss. So resources should not at a closer time have more value than resources for a much longer time (Umam, 2013).
4. Islamic Capital Structure Theory
The theory of capital structure that describes Islamic values is the capital structure that gives priority to its capital. This is by the teachings of Islam to avoid debt due to the danger of the debt itself. However, Islam also offers alternative funding if the capital itself is perceived as inadequate, namely the issuance of shares or Islamic bank financing, with musharakah.
The existence of a portion of its capital owned by the owner of the corporate is a guarantee of capital given by shareholders, as well as gives a good signal to shareholders that the corporate has a stable condition in terms of financial management (signaling cost). The portion of its capital by the owner or manager of the corporate over shareholders or bank funding, according to Ahmed (2007) are:
≤ Ld = Long-term debt
Aft = Fixed-Tangible Asset
In short, the characteristics of funding alternatives that can be selected by the corporate, are presented in Table 1 below:
Table 1. Characteristics of Funding Alternatives in Islamic Corporate Funding Alternatives Capital Merger Shares Issues Islamic Banking
Funding
Aqad Musharakah Musharakah Musharakah
Capital adding Before the corporate formed
After the corporate formed
After the corporate formed Active management
by the capital holder
Managed together, as the owner
Active role, as an investor
Passive role Rate of profit-loss
sharing
Based on a portion of capital
According to the agreement, consider the portion of capital and portion of management
Appropriate agreement at the beginning of the contract
5. Islamic Cost of Capital Theory
The first funding alternative, that merger of two owners’ capital to become their capital for the corporate, then obviously does not incur capital costs. This is because both parties who own the funds are also the owners and managers of the corporate, so both are entitled to corporate profits. The share of profit sharing and loss will be as much as the portion of capital they have in the corporate.
Furthermore, funding alternatives through the issuance of shares and financing of Islamic banks will incur capital costs. In this case, the shareholder is in the position of the owner of the fund who has no role in managing and overseeing the corporate as much as the owner of the corporate. Therefore, the level of profit sharing between the two will take precedence over the agreement, taking into account the portion of management and supervisory roles, as well as the share of capital. The formula for capital cost calculation is as follows:
RE = Return of Equity Rm = Estimate of Rm
Β = Estimate of β, from covariance (I, M) / variance (M) Rf = Estimate of Rf as a proxy of Rf
While on funding alternatives from Islamic banks will also incur a capital cost of the agreed profit-loss sharing rate. The level of profit sharing is generally explained by Siddiqi (1983) as a form of equilibrium mechanism between Syirkah's demand for funds by the customers and Syirkah's financing offer by Islamic banks. The determination of Islamic bank’s rate of profit-loss sharing by the equilibrium
mechanism between the supply and demand of syirkah funds by banks can be described in Figure 2 below:
Figure 2. Determining The Rate of Profit-Loss Sharing
6. Islamic Financial Instruments
About funding alternatives of companies in the form of shares or financing in the form of financing from Islamic banks, the financial instruments can be used in the form of shares (musharakah) and financing (musyarakah). The shares scheme with the musyarakah contract in this case adopts the characteristics of class B shares submitted by Ahmed (2007), where the owner of the shares will have voting and managing rights within the corporate, or in other words, the investor plays an active role in the management of the corporate. This class B shares scheme also does not justify that investors are more concerned with profits in the short term, so the determination of the investment period of the investor in the company must be agreed between the two parties, based on the intention of helping in goodness, and can be extended based on the investor's assessment of company performance.
This is done to avoid the occurrence of speculative purposes among investors.
However, other characteristics of class B shares described by Ahmed (2007) can also be adopted into the characteristics of these shares instruments, such that the dividend distribution of the corporate with the principle of profit-loss sharing is based on the net income of the corporate before the determination of retained earnings. The amount of profit-loss sharing for the corporate will be retained earnings for the corporate, while the portion of profit-loss sharing to be given to the investor will be the dividend distributed.
As for financing instruments from Islamic banks in the form of financing has a pure characteristics such as class A shares submitted by Ahmed (2007), among others, the absence of the right of supervision and management of the corporate; a profit- loss sharing shared based on profit-loss sharing principles and calculated from net income after retained earnings; as well as the term of the debt that has been determined.
7. Islamic Capital Budgeting
The additional capital that is owned by the corporate can then be managed into the assets needed. Some of the preferred investment alternatives for managing capital are, among others, branch expansion or maximizing existing assets. Therefore,
investment decisions need to be chosen very wisely. Akram Khan in Agustin (2017) explains that there is an alternative investment valuation method that does not include the calculation of discounts in it, the method of Investible Surplus Method (ISM) which calculates a large surplus of business investments carried out over time, calculating several years for investment surplus (after return on capital). The assumption used is all cash inflows running until the end of the period; investments made at the beginning of the period; as well as the careful use of cash. The calculation of the following Investible Surplus (IS) can be calculated by the following equation:
= ( − )( − )
!"
ISn = Surplus of investigation after n period Bt = Benefit (such as cash flow)
Ct = Cost
n = Period of business t = Time period
In addition, as an alternative investment assessment, Agustin (2017) describes the concept of investment valuation by Islamic principles, using gold as a monetary standard. The calculations used in the opinion of Ibn Khaldun states that the manufacture of coins is only a guarantee given by the ruler that the coin contains a certain amount of gold and silver content (Agustin, 2017). Therefore, the investment valuation is based on the value of gold applicable at the time of the investment. Briefly, the valuation of the investment is described in the following calculation of the Gold Value Method (GVM) (Agustin, 2017):
GVn = Valuation of investment in gold standardization LBt = Net profit (cash flow) in t period
Nt = Portion of profit-loss sharing in t period HEt = Gold value in t period
INV = Initial investment HE0 = Initial gold value
8. Capital Working Management
In addition to the management of the corporate’s capital into assets in the form of investment, other financial management that should be considered by the company is the optimal composition between long-term and short-term financing, as well as its optimal allocation also on current assets in the form of cash, securities, business, and inventory; or so-called working capital management. Funding can be used to fund the corporate’s current assets, in the form of equipment and equipment, one of which is debt. The aqad used is ijarah or ijarah muntahiyah bittamlik (IMBT), and murabahah.
Ijarah or IMBT contracts may be used by corporates for the purchase of assets of fixed assets, such as buildings, warehouses, shop houses, or land; by leasing the asset system within a certain period until ownership changes hands, belongs to the company. Murabahah schemes may be used by corporates to finance the purchase of non-fixed assets, such as machinery or operational vehicles, with a certain margin level determined by Islamic financial institutions and agreed upon by both parties.
9. Islamic Financial Reports
Financial reporting is also a form of corporate manager responsibility to all stakeholders. Stakeholders in this case are not only the importance of shareholders or investors, but also employees and consumers, because in the purchase price paid by consumers on goods and services sold by the company, there could be some zakat or deposit (e.g., tax) paid by consumers through the purchase of goods/services.
Some things to note in the financial reporting of Islamic corporate first are related to the philosophy and criteria of the financial statements. Islamic financial statements, according to Baydoun & Willett (2000) philosophical principles that refer to the oneness of God, the level of religiosity, community, fair profit, equality, and environmental conservation. So, the preparation of financial statements can form several criteria that become the identity of financial statements of Islamic corporate, disclosure as a whole (full disclosure) and public accountability (public/social accountability).
The second thing distinguishes Islamic corporate's financial statements from conventional technical-related recordings. If in the principle of the conventional financial report, there are three alternative recording principles, namely accrual, semi-accrual, and cash; then in Islam, the principle of accrual basis on the recording of income and expenses is highly recommended. Based on the accrual basis principle, the income will be recorded when the company has delivered the service/product, and the expense will be recorded when the company has consumed the benefits of the service/product received, without having to relate it to the existence of the cash.
The next difference is the recording of the profit margin in the murabahah contract transaction in the trading company. Profit margins in Islamic entities are accounted
for by the perpetual system, in which transactions that cause changes in the merchandise are directly recorded in the “Inventory” account. So that inventory can always be updated along with merchandise changes. In addition, the Islamic corporate must present information on a separate account of the amount of profit in each sale. Profit margin is the gross profit which is the difference between the selling price and sold product cost or cost of goods sold (HPP). However, technically, recording profit margins will form a “Profit Margin” account without having to establish a Cost of Good Sales (HPP) account (Warsono & Andari, Basic Accounting for Islamic College 2015).
In addition, the types of financial statements that should be presented by Islamic entities will differ from conventional corporate, is the addition of source reports and the use of zakat funds and the funds of virtue; and value-added statements that are deemed obligatory to report in addition to income reports, related to social obligations paid by the company and may add value to the company. In the end, all financial statements that must be presented by Sharia companies are illustrated in Figure 3 below:
Figure 3. The Required Islamic Corporate Financial Reports
Source: Baydoun & Willett (2000)
10. Islamic Financial Report Analysis
Financial analysis performed as a measure of financial performance in Islamic corporates in general is no different from conventional corporates. The analysis is also conducted based on the data presented in the financial statements, either affecting the financial performance directly or not. Centro and Peter in Alani, et.al (2013) detail the aspects of an organization's performance that are influenced by its organizers. This can be an important aspect that needs to be considered for later analysis as performance evaluation material, in addition to financial analysis in general. In detail some good financial statement analyses presented by Sharia entities are presented in Table 2 below:
Table 2. Ratios for Islamic Financial Report Analysis
Stakeholder Ratios Formula
Consumer Sales volume growth ratio = (#$%&#)' (#$%&#)'()
Average sales volume =∑.'/)+&,& -&
Selling price of goods/services
ratio = #&%%0 1 2+03& 4 144 #/#&+,03&#'
#&%%0 1 2+03& 4 144 #/#&+,03&#'() Supplier Stock turnover ratio =0 ,& 4+6 ,$%-&#$%&#
Average raw material delivery
ratio = -78&+ 4 +$9 7$&+0$%#
:;<
Raw materials volume growth
raio = ( -78&+ 4 +$9 7$ &+0$%#)' ( -78&+ 4 +$9 7$ &+0$%#)'() Raw materials cost ratio = 34# 4 +$9 7$ &+0$%#'
34# 4 +$9 7$ &+0$%#'() Finance Revenue ratio =+&,& -&
$##& #
Value market growth ratio = (7$+=& ,$%-& 4 #>$+&#)' (7$+=& ,$%-& 4 #>$+&#)'() Profit-loss sharing growth ratio = (2+4 0 ?%4## #>$+0 1)'
(2+4 0 ?%4## #>$+0 1)'() Individu Productivity ratio =@$+ 0 1 A &+ B$C
&72%46&&
Legality and
advocacy Legality and advocacy costs ratio =34# 4 %&1$%0 6 $ $ ,43$36
34# #
Social and religious responsibility
Zakat, infaq, sadaqah ratio =34# # 4 #430$% + #080%0 6
@$+ 0 1 D& 4+& B$C Source: Kasmir (2014); IAI (2007)
In addition, referring to maqashid sharia as an objective of the corporate in the Islamic perspective, measurement of the achievement of maqashid sharia values can be done through Sharia Maqashid Index adapted from Mohammed (2008) which measures the following aspects:
Table 3. Sharia Maqashid Index Measurement Sharia Objectives
(Maqashid Sharia)
Element Ratio
Tahfidz al Fard (Educate individuals)
Advancement knowledge Education grand or research expense to total expense
Installing new skills and improvement
Training expense to total expense Creating Islamic brand
awareness
Publicity expense to total expense Iqamah al adl Fair returns Profit equalization reserves (PER)
to net or investment income
(Uphold justice) Cheap products/services Mudharabah and musyarakah mode to total investment mode Elimination of injustices Interest-free income to total
income Jabl al Maslahah
(Creating Goodness)
Profitability Net income to total asset Redistribution of income &
wealth
Zakah paid to net asset
Investment in the real sector Investment in real economic sectors to total investment.
Source: Mohammed (2008)
11. Conventional and Islamic Corporate Financial Management Comparison
In detail, the comparative comparison of conventional and Islamic corporate financial management in some aspects can be seen in Table 3 below.
Table 3. Comparative Comparison of Conventional and Islamic Financial Management
Aspects Conventional Corporate Islamic Corporate
Time Value of Money
Differentiate future and present value caused by investment, in the amount of interest rate.
Allowing time value of money in several conditions, such as:
a. Time preference of installment goods/services transaction b. Time value of money of
investment evaluation Capital
Structure Theory
Some capital structure theories that explain the corporate’s preferences in determining the composition of its funding, considered the benefits and costs aspect of funding alternatives.
a. Trade-off Theory b. Signaling Theory c. Pecking Order Theory
Funding alternatives for Islamic corporate
a. Owner’s capital
b. Issuing musyarakah shares c. Islamic banks funding with
Musyarakah scheme
Cost of
Capital Theory
Weighted Average Cost of Capital Theory, which explained corporate’s preferences to choose the minimum level of capital cost in determining funding decisions. The capital cost consists of:
a. Cost of debt (Kd) b. Cost of equity (Ke)
There are two capital cost calculations based on the corporate funding alternatives above:
a. cost of equity
b. The rate of profit-loss sharing, which was determined by the initial offer by the Islamic bank, was followed by an agreement between the two parties.
Financial Instruments
There are levels of characteristics and preferences in the following conventional financial instruments:
a. Obligation
b. Preference shares
The funding alternative of the Sharia companies above creates two alternative financial instruments that do not have more preference for one of its instruments, that is:
c. Common shares a. Shares
b. Islamic banks funding Capital
Budgeting
Several methods of capital budgeting are based on the discount rate (equivalent to the interest rate):
a. Net Present Value b. Payback Period
c. Discounted Payback Period d. Internal Rate of Return e. Profitability Index
The method of valuation of investments that are not based on the discount rate, as well as the method of equalizing the value of investments to the value of gold:
a. Investible Surplus Method b. Gold Value Method Working
Capital Management
Alternative funding of the corporate’s current assets, from conventional banks with interest rates in determining the price:
a. Banks debt b. Hedging
Alternative funding of corporate’s current assets, from Islamic banks that do not use interest rates in determining the price:
a. Ijarah or IMBT b. Murabahah Financial
Statements
The types of financial statements presented by conventional corporate:
a. Balance sheet b. Income statement c. Cash flow statement d. Statement of owner equity e. Notes of financial statement
Financial statements to be presented by Islamic corporate:
a. Balance sheet (historical cost &
current value)
b. Income statement & Value- added statement
c. Cashflow statement d. Statement of owner equity e. Source and use report of zakat
funds
f. Source and use the report of welfare funds
g. Notes of financial statement Financial
Statements Analysis
Financial statement analysis to measure the performance of corporate:
a. Liquidity ratio b. Solvability ratio c. Activity ratio d. Profitability ratio
Islamic corporate performance analysis that accommodates all stakeholder importance, that is:
a. Consumers b. Suppliers c. Financial d. Individu
e. Legality and advocacy
f. Social and religious responsibility
Conclusion
The concept of financial management in Islamic corporate should be based on the principle of freedom responsible for managing the resources available in this universe, so that the welfare of the people can be guaranteed, both in the world and in the hereafter.
The objectives of the corporate in the Islamic perspective should be started from the most basic objective of the fulfillment of maqashid shariah, which covers the five basic
human needs of the protection of religion, soul, descent, reason, and property.
Furthermore, entering the corporate’s goal in the field of economy is the fulfillment of utility with tautological motives. The objectives of the corporate are then formulated on a single purpose which is falah, which accommodates utilities for all stakeholders.
The concept of corporate financial management in various aspects should also be based on Islamic principles and values that are summarized in the objectives above.
Therefore, Islamic corporate finance as a whole concept of financial management aimed to maximize the corporate’s value; including managing the Islamic capital structure and financial instrument that follows into an optimum capital budgeting, adding an Islamic working capital, and declaring it in a financial statement that also analyzed by Islamic indicators and ratio that measuring corporate financial performance according to not only the corporate’s value reflected by share, but also the Islamic value of the corporate based on Islamic objective mentioned.
This research may be continued by exploring more Islamic financial instruments that might develop in the future. Also expand performance analysis with other indicators that can measure Sharia compliance as an application of Islamic values such as maqashid sharia and Sharia Governance, according to the financial reports.
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