Perception of Small and Medium Enterprises about Islamic Banks in Oman: Evidence from Survey Data

Abstract

Islamic banking system is one of the fastest growing sectors of the global finance industry. It has an enormous potential to satisfy the financing needs of SMEs that wish to share business risks with financers because Islamic banks allow customers and investors to involve with interest-free financial transactions on a risk-sharing based Shariah-compliance products. From this perspective, this paper aims to identify factors that influence SMEs in Oman to choose a particular bank. In addition, the paper examines the determinants that attract SMEs in Oman to choose (or not to choose) Islamic banks. To achieve these objectives, the paper collects data from 106 SMEs from the Muscat governorate in Oman. Applying structural equation modeling (SEM), the paper finds that Islamic banks’ attractive package including favorable terms and conditions, easy access to financing facilities, availability of sufficient branches and ATMs facilities, and the existence of electronic banking system influence customers to establish business ties with Islamic banks. The paper further shows that SMEs in Oman are optimistic about the thriving future of Islamic banks in the country. The paper offers important policy prescriptions for regulatory authority, practitioners, and customers of Islamic banks.