**Governments should play a critical role in promoting an enabling environment in which private banks can fulfill their SME finance targets prudently and responsibly.** In the case of non-GCC countries, there is huge potential for expanding SME finance, with large numbers of smaller enterprises underserved and low levels of bank competition to serve them.  In the case of GCC countries, the size of the SME sector may remain more constrained by the nature of oil economies, but there is also scope for further SME finance, especially if access to finance is also expanded for resident non-nationals.<sup>36</sup>

**V.4.** **_Policy Recommendation IV -_ Institutionalization of Islamic Redistributive Instruments**

Islamic finance advocates risk sharing and equity finance, while prohibiting debt financing and leveraging. Given the emphasis on social and economic justice and the eradication of poverty, we would expect Islamic instruments that targeted to address inequity, such as _Zakah_ , khairat, _Waqf_ , and _Qard-al-Hassan_ , to play an important role if the required institutional structures are developed. Therefore, there is need to formalize or institutionalize Islamic redistributive mechanisms designed to empower the economically weak segments of the society.<sup>37</sup> By institutionalization, we mean to build nation-wide institutions and surrounding legal infrastructure to maximize the effectiveness of these redistributive mechanisms. This institutionbuilding exercise can take place in three steps. First, is the development of institutions. An institution is nothing more that the legalization of the rules of behavior and therefore, would require crafting rules pertaining to these instruments as envisioned by _Shariah_ . The next step would be to establish these institutions and to integrate them with the rest of the economic and financial system. In this process, either existing channels of distribution, i.e. banks or post offices can be utilized to interact with the customers, or new means can be introduced leveraging of new technologies. Finally, there should be mechanism to ensure enforceability of rules through transparent means.

The objective of institutionalization of redistributive instruments is to formalize and standardize the operations to facilitate each instrument. For example, for _Zakah_ , Khairat, and Qard-al-Hassan, a formal network of institutions needs to be developed to collect, distributed, and recycle the funds in most efficient and the most transparent fashion. In some countries, point of sale such as Automatic Teller Machines (ATM) or cash dispensing machines are used to give

> 36 Maddedu provides a review of credit reporting systems in MENA (2010). (Rocha 2010)

> 37 (Mirakhor 2004) argues that given the number of poor in Islamic countries, critics argue that, a priori, Islamic institutions, which were meant to redistribute income and wealth from the more well-to-do to the weaker segment of the society, have not shown the necessary potency in performing their function, and they could be right. It is a serious problem that very little effort has been expended by our researchers and scholars in empirically investigating the behavior of Muslims vis-à-vis these institutions, i.e., why the latter have failed to achieve the objectives for which they were designed, and how the situation could be remedied. Admitting that these institutions have, by and large, failed to alleviate poverty in Muslim countries does not obviate the need to consider their potential..

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