In Egypt, 20% of small- and medium-sized enterprises (SMEs) have indicated a preference for Sharia-compliant products, according to an IMF working paper issued this month.
While Saudi Arabia comes in first place with 90 % of SMEs indicating a strong preference for Sharia-compliant products, Lebanon comes in last amongst Organization of the Islamic Conference (OIC) countries with just 4%.
The paper said there is a substantial demand for Islamic banking among the MENA region’s SMEs, with approximately 35% expressing their interest in financing by Islamic banks.
Islamic banks need to make adjustments in the structure of their work to improve their ability to reach consumers. They also need to sell their products to the global Muslim population segment that does not currently have a bank account, according to the paper.
Banks need to focus on SMEs and pursue private equity and venture capital initiatives, the paper said.
The paper revealed the recent rapid global growth of Islamic finance – with Islamic financial institutions’ assets more than doubling since 2006 – does not mean they reflect positively on product delivery to companies and individuals without bank accounts.
“Some Islamic banks have already started to work on states with a large Muslim population who lack banking services such as Kenya and Iraq,” the paper read.
The working paper proposed several recommendations for enhancing the contribution of Islamic finance to financial inclusion.
These solutions and recommendations represent changes to the operating model of Islamic banks that may enhance inclusion. This means Islamic banks could create separate SME business units and improve the training of bank personnel in Sharia-compliant instruments.
The additional potential development of Islamic microfinance could be explored, as well as the establishment of Islamic equity funds for SMEs and the institutionalisation of Islamic redistributive mechanisms.
The paper added that improving financial infrastructure, introducing a more competitive banking system, improving the quality of credit information and enhancing the efficiency of the legal system will help promote financial inclusion.
The paper investigated the relationship between Islamic banking and financial inclusion through a sample of 57 OIC member countries. It compared the means of selected financial inclusion variables to those in non-OIC countries.
The paper justified the selection of the sample based on the population of those states showed the highest levels of interest in religious motives during determine their willingness to open bank accounts.