Acceptance of Interest-Free Banking among Small and Medium Enterprises: A Structural Equation Model

Interest-free banking in Nigeria is evolving, which is supposed to be solid and ready to compete with conventional commercial banks that have dominated the market for more than a century. SMEs had difficulty in getting the funding they required to grow. The study examines the determinants of SMEs' acceptance of interest-free banking in Nigeria. The study used purposive sampling and adapted a questionnaire to collect data from a sample of 323 SMEs registered with the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN). A structural equation modelling via analysis of moment structures (SEM-AMOS) was used for data analysis and hypotheses testing. The study found a significant positive relationship between SME owners' religion, financing opportunities and acceptance of interest-free banking. The study also finds a positive but insignificant effect of a service cost on the acceptance of interest-free banking. Knowing the drivers of SMEs' acceptance of interest-free banking could guide banks' marketing strategies to compete with other types of banks in the industry. The study recommends that interest-free banks ensure the provision of products and services that comply with the religion of their existing and potential customers.