SMEs IN THE MENA REGION

ACCESS TO FINANCE
Dr. Adli Kandah
Di
Director
G
Generall
Association of Banks In Jordan

International Arab Banking Summit 2011

2011,, The Future of MENA, Impact on Global Economy
2011, Rome - Italy
23rd 24th of June 2011,

OUTLINE
The Role of SMEs in in the MENA economies.
SMEs Access to Finance in the MENA Region.
g
Why Banks lend SMEs ??
The Main Obstacles to SME lending.
SME Products in MEAN Region.

The role of the SMEs in the MENA economies

In MENA region, SMEs are the main drivers of job creation, growth
and economic diversification.
SMEs are dominant in MENA economies, they constitute over 85%
of companies in the MENA region.
Over 90% of SMEs in MENA region employ less than 50 employees.
employees
SMEs in MENA region contribute to over 2/3 of total formal
employment (Proportion of employment in firms that have less than
50 employees)
l
)
SMEs have a significant share of value added in GDP (60% GDP).

SMEs Access to Finance in the MENA economies

large
firms

Access to
finance

Finance

SME
s

The Status of SMEs Lending in MENA countries

SME Loans/Total Loans (%) in MENA Countries
40%
34.3%
30%
20.3%
20%
14.6%15.3%
12.5%
10%
0.5% 1.1% 1.7% 2.0% 2.5% 2.5%

3.9% 4.1%

16.1%

5.2% 6.2%

Sy
ri
a
Eg
Pa yp
t
le
st
in
e
Jo
rd
a
N
on n
-G
C
Tu C
ni
si
Le
a
ba
no
n
Ye
m
en
M
or
oc
co

E
A
U

uw
ai
t
O
m
an

C
G

B
ah
ra
in
Sa
ud
i

at
ar

0%

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.

Bank Involvement with SMEs in MEAN countries

100%
80%

96%
87%

87%

60%

61%

40%
20%
0%
GCC
% of banks w ith SMEs as a clients

Non-GCC
% of banks w ith a separte units for SMEs

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.
6

Why Banks lend SMEs ??

Driver for SME Financing: in GCC and Non-GCC countries

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.

The Main Obstacles to SME Lending

Obstacle for SME Financing in GCC and Non-GCC countries

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.

Fixed Collateral

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.

Movable Collateral

Source: Rocha, et al., 2010, The Status of Banks Lending to SMES in The MENA Region. Joint survey of
Union of Arab Banks and World Bank.

10

SME Products in MEAN Region

MENA banks provide the following SME Products:
Products Offered for SMEs

% of Banks offering services

GCC Banks

Nom-GCC Banks

1) Deposits and cash management

98%

88%

2) Loans

98%

95%

3)) Trade Finance

98%

86%

4) Payments & Transfers

85%

86%

5) Line of Credit/Overdraft facilities

90%

76%

6) Advice and Technical Assistance

38%

55%

7) Leasing

31%

26%

8) Insurance

19%

34%
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SME Products in MEAN Region

12

Risk of SMEs Lending in MENA Region

% of Banks responding that SME lending is more or equally risky
than other business lines

13

The Selection Criteria used for targeting SMEs

% of Banks indicating the selection criteria used for targeting SMEs

14

The Risk Technique used for SMEs in MENA

% of Banks indicating the risk technique used for SMEs in MENA

15

IFC Financing to SMEs in the MENA Region

IFC is working to develop solutions to close the micro,
small and medium enterprise (MSME) financing gap,
small,
gap
collaborating with 38 financial institutions across 14
countries in the Middle East and North Africa.
As of June 2010, IFC committed a total of $1 billion to
MSME finance in the MENA region,
g , with $$140.7
million in fiscal year 2010.
IFCs
IFC s SME financial institution (SME FI) clients had
68 thousand loans outstanding to SMEs by end of
2009, totaling $8.4 billion in this region.
16

IFC Financing to SMEs in the MENA Region

17

IFC Financing to SMEs in the MENA Region

18

IFC Financing to SMEs in the MENA Region

19

SMEs Financing - A challenge in MENA

Marginalization of SMEs in MENA region, and Larger informal sector.
MENA region not extraordinary in this sense but extent of the problem
varies
i by
b country according
di
to Legal
L l system, liquidity
li idi in
i the
h economy,
corporate governance standards, banking & capital markets development.
Difficulty distinguishing financial situation of the firm from owners.
Relationship between firms and stakeholders is personal.
Heterogeneity: Wide variance of Size, profitability and growth
Corporate
p
governance p
g
principles
p difficult to enforce in familyy SMEs.
Structural rigidities and distortions:
Macroeconomic imbalances
Domestic savings-investment
savings investment imbalance
Legal, institutional and regulatory framework
Structure of the financial system
Result: High collateral requirements, high rejection rates, informal
finance, particular problems for enterprise with intangible assets.
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SMEs Financing - A challenge in MENA

Limited competition in the banking sector, high barriers to access.
Market is highly concentrated by top 3 banks.
banks
Limited foreign ownership of banks in some countries, while some
countries have opened
p
up
p banking
g sector to competition.
p
High cost of capital relative to OECD countries:
g interest rates used to compensate
p
for the lack of credit
High
related information.
Credit bureau lacking.
Low overall pool of credit to the private sector in comparison with
OECD countries.
Low
L credit
di ratios
i to GDP in
i a number
b off countries.
i
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SMEs in Jordan
SMEs play a crucial role in growth and sustainable development in
Jordan.
SMEs constitute 95% of Jordanian economic entities.
SMEs account to 40% of GDP.
SMEs
SME contribute
t ib t to
t creating
ti 70% off the
th job
j b opportunities
t iti .
SMEs receive about 6% to 10% of total lending.
SMEs in Jordan face a number of challenges that related to:
Access to finance
Lack of collaterals and guarantees
High risk
Lack of disclosure and transparency (especially for small
enterprises)
enterprises).
22

CBJs Definition of SMEs

The Central Bank of Jordan (CBJ) has issued a formal
definition for SMEs which include specific
p
criteria as follows:
For Small Enterprises:
The firm shouldnt be a public shareholding, or
ins rance firm,
insurance
firm or brokerage firm.
firm
The size of assets or sales volume should be less than
JD 1 million.
The number of workers should be between 5 and 20.
For Medium Enterprises:
The
Th size
i off assets or sales
l volume
l
should
h ld be
b between
b
JD 1 million and JD 3 million.
The number of workers should be between 21 and 100.
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CBJ and SMEs Financing

In order to encourage SMEs financing, the CBJ has issued a new
circulation for the Licensed Banks that imply releasing 100% of the
balance of credit facilities granted to SMEs from the required
reserve amount, if the following conditions are met:
The interest rate on the SMEs facilities is less than the prime
lending rate by one percent.
The size of facilities granted for each customer shouldnt exceed
JD 1.5 million.
Theses credit facilities shouldnt be used to repay the existing
credit facilities.

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ABJ and SMEs Financing

Association of Banks in Jordan (ABJ) and Jordan Enterprise
Development Corporation (JEDCO) have signed a memorandum of
understanding
d
d
that
h aims at facilitating
f l
access to finance
f
f SMEs,
for
S
hence facilitating the development of banks SME activities, through
forming SME Financing Advisory Committee (SMEFAC).
The SMEFAC is hosted by the ABJ and constituted of representatives
of banks and relevant partner institutions involved and interested in
p g their SME financing
g activities.
developing
The SMEFAC will play the role of a dialogue and advocacy platform
between the banking sector and other relevant financial institutions,
the SMEs,
SMEs government officials,
officials regulatory institutions,
institutions donors,
donors and
non-banking financial institutions; it is aimed at advocating SME
financing both within and outside the banking industry.

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Jordanian SME Financing Program

The program will start by the end of July 2011 and to be implemented
by the Ministry of Planning and International Cooperation and the
Mini tr off Industry
Ministry
Ind tr and
nd Trade.
Tr d
The program seeks to encourage financial institutions to facilitate
loans to SMEs, particularly those in governorates. According to official
figures, SMEs in Jordan receive only 10 per cent of the overall credit
facilities extended by commercial banks.
Under the p
program,
g
, loan g
guarantees that range
g between $$250 million
to $350 million will be allocated to cover around 85 percent of the
overall amount of the loan.
Adding that $250 million in loan guarantees will be through the US
Overseas Private Investment Corporation while the other $100 million
will be through the International Finance Corporation.

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