Revealing the secrets of working capital: A comparison between sharia-compliant and conventional firms

This research compares the performance of sharia-compliant (SC) and non–shariah-compliant (non-SC) firms by examining the impact of working capital on the return on assets, the return on equity, and the net profit margin. The dataset, based on the Dow Jones Islamic Market Index (DJIMI) standards, is divided by the leverage ratio and includes PSX-500 firms listed in the Pakistan Stock Exchange from 1996 to 2020. Our findings reveal that working capital has a significant and positive effect on all firm proxies, among which non-SC firms outperform SC firms because of their access to funds for business operations. SC firms face restrictions in obtaining funds from conventional banks. Our study has many implications. As liquidity injection is crucial for growth, policy makers should focus on developing novel credit instruments that are SC to address financing needs and boost business operations. • Non-Shariah-compliant firms outperform Shariah-compliant ones in working capital use. • Urges non-SC firms to adopt ethical financing and prudent risk management to avoid bankruptcy risks. • 2007–09 financial crisis differently affected firm performance based on working capital management. • Highlights how unrestricted access to debt financing boosts non-SC firms' operations and performance. • Provides investors with a framework for evaluating firm performance through working capital management, advocating for a diversified portfolio of SC and non-SC firms.