Influences of Islamic Practices on Small Firm Performance: A Study in North Sumatera, Indonesia

Abstract

Islam as ad-din (way of life) outlined value systems established by al-Quran and al-hadith in every aspect of life. The underlying principle of the Islamic values is the well beings of human life and the ‘alam (environment).  This study aims to investigate the impact of Islamic practices on small firm performance. Conceptually, practices translate knowledge, ability and experience into action for desired outcomes or performance.  Three main theories namely the theory of human capital, organization and strategy are used as the underpinning theories in explaining performance. Ten independent variables delineated from the respective theory are chosen for developing a multivariate performance model. It includes networking, branding, financing, motivation, education, training, business experience, firm’s size, ownership and age as independent variables, while performance is conceptualized as sales growth serves as a dependent variable. The ggovernment support towards Islamic practices in small firm is tested for its moderating effects. The study approach is evidence-based positivism and employs quantitative deductive hypotheses testing methods.  The sample size (N) is 370 small firms’ owner-managers randomly picked from four regions in the Province of North Sumatra, Indonesia. The measurement justifications are based on the Islamic values/perspectives or conventional values that are in compliance with the Islamic principles. It is found that all the Islamic practices captured in the independent variables are positively related to the firms performance, while,  the Government supports moderates the relationship between the Islamic practices and the firm performance. This findings might add knowledge to the small firm performance literature, probably help policy makers in their decision making regarding small firm sector, and possibly small firms’ owner-managers who want to improve their performance.

Keywords: Islamic practices, government support and firm performance.