Regulators, economists and financial institutions in the Middle East and North Africa (MENA) agree that the small and medium enterprise (SME) sector is highly effective in terms of job creation and economic growth—currently the region’s top priorities.
SMEs have a proven track record of driving growth and increasing employment; all that remains is for financial institutions to concentrate on the SME segment, regulators to drive creation of an enabling environment and small businesses to enhance their business acumen and be transparent.
With greater competition and reduced profit margins in corporate and retail banking, banks are increasingly looking to diversify into new business lines to maintain and enhance their profits. In addition, banks are looking at differentiating themselves from one another by offering innovative tools and reaching out to untapped markets.
The SME sector offers significant business and differentiation opportunity to banks in the MENA region. Income growth in the SME sector is known to clearly outperform other business lines and yield two to three times as much as traditional business segments.
From being considered a market that was too difficult to serve, SMEs are increasingly becoming a strategic target of banks worldwide. The so called missing middle, describing the gap in financial services provided to SMEs, is shrinking.
But the key to the growth of SME Banking may be that banks are starting to better understand the particular needs and preferences of SMEs—as well as their importance to overall growth—and are developing tailored approaches to overcome the traditional challenges of high credit risk and high service costs.
From simplified dedicated loan and liability products to customized alternate channels and Islamic finance solutions, banks are now increasingly trying to build innovative approaches, products and tools to reach out to SMEs.
There are plenty of examples of diverse and successful SME packages being offered by banks around the world: Garanti Bank in Turkey have reached nearly 10 thousand women through their Women Entrepreneur support package; TEB Bank in Turkey pioneered differentiation through SME advisory services; WING in Cambodia offer mobile-money solutions; and ICICI Bank in India and NAFIN in Mexico offer creative supply chain finance solutions.
However access to finance is still a challenge for SMEs in MENA. A World Bank/Union of Arab Banks survey of over 130 MENA banks found that only about 8 percent of all lending goes to small businesses. To put this in perspective, in high income countries nearly 22 percent of bank lending goes to small businesses, which duly contribute more than 60 percent towards both the GDP and private sector employment.
These statistics represent the largely untapped potential of SME’s in the MENA region and a huge opportunity for job creation, economic growth for the MENA countries and an attractive and profitable opportunity for banks.
Access to finance for women entrepreneurs is a key issue in MENA. Female entrepreneurship is under 15 percent compared to a global average of almost 40 percent. In a recent survey 70 percent of MENA Businesswomen’s Network members cited lending conditions in their respective countries as very restrictive. Clearly a stronger area focus and greater shifts in attitudes are required in order to encourage approximately half of the population to make their valuable contribution to the economy.
Lack of SME transparency, inadequate collateral coverage, insufficient credit information systems and weak legal creditor rights pose the most serious challenges to banks in MENA.
Putting in place a supporting and enabling environment that allows banks and other financial institutions to lend more easily is essential, but it is also vital for banks to understand the needs of small businesses, and the importance and profitability of providing financial services to SMEs.
A sizeable and largely untapped population of nearly 23 million SMEs in MENA presents a glaring opportunity, not only to support economic growth and job creation in MENA but also for banks to build a profitable business from the market.
Qamar Saleem is Senior Operations Officer, IFC Middle East and North Africa.