26 Islamic Financing Islamic financing forbids the use of interest in any financial security, and this will clearly have an impact on the capital structure decisions of firms that follow Shariah principles. At the same time, many Islamic securities have the same cash flows requirements as Western financial securities.

Explain how the costs of financial distress are affected in the event a firm with Islamic securities finds itself near insolvency. Are Islamic securities better in this regard? Explain why, or why not.