The absorption of financial services in an Islamic environmentCharilaos Mertzanis

This study examines the determinants of access to finance by firms residing in 42 Islamiccountries. Firm-specific characteristics, such as size, sector, legal status and export statusare found to be robust predictors of financing constraints of firms. Small-size firms appearto face more binding financing constraints, whilst firms operating in manufacturing andfocusing on exports appear to face lower constraints. The auditing of accounts, the locationof operations and ownership structure appear significant with a varying effect on direction.Differences are documented on the role of firm-specific characteristics between Islamicand non-Islamic countries. Both the absolute and relative size of Islamic bank assets is asignificant predictor of firms’ financing constraints. The results add new insights on therole of non-economic institutions, social and cultural factors across regions in predictingfinancing constraints of firms in Islamic countries. Effective financial inclusion reform mustfocus on small-size, introverted and services-oriented firms operating in some distancefrom the center as well as understand the divergent role of institutions, social structuresand culture within the Islamic world.