SMEs in the MENA Region

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    SMEs IN THE MENA REGIONSMEs IN THE MENA REGION

     

    Dr. Adli KandahDr. Adli Kandahrector enerarector enera

     Association of Banks In Jordan Association of Banks In Jordan

    International Arab Banking SummitInternational Arab Banking Summit 20112011, “The Future of MENA, Impact on Global Economy”, “The Future of MENA, Impact on Global Economy”

    2323rdrd –  – 2424thth of Juneof June 20112011, Rome, Rome -- ItalyItaly

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    OUTLINE

     The Role of SMEs in in the MENA economies.

     SMEs Access to Finance in the MENA Re ion.

     Why Banks lend SMEs ??

     The Main Obstacles to SME lending.

    SME Products in MEAN Region.

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     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.

    .

    SMEs in MENA region contribute to over 2/3 of total formalemployment (Proportion of employment in firms that have less than

    emp oyees

    SMEs have a significant share of value added in GDP (60% GDP).

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    SMEs Access to Finance in the MENA economies

    large

    Finance

    rms

     Access tofinance

    SME

    s

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     The Status of SMEs Lending in MENA countries

    SME Loans/Total Loans (%) in MENA Countries40%

    34.3%

    30%

    20.3%

    16.1%15.3%14.6%12.5%

    20%

    3.9%6.2%5.2%

    4.1%2.5%2.5%2.0%1.7%

    1.1%0.5%

    10%

      Q  a  t

      a  r

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      n  o  n

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      e  n

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      o  c  c  o

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

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    Bank Involvement with SMEs in MEAN countries

    87% 87%

    96%

    80%

    100%

    61%

    40%

    60%

    0%

    20%

    GCC Non-GCC

    % of banks w ith SMEs as a clients % of banks w ith a separte units for SMEs

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    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.

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     Why Banks lend SMEs ??

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

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

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     The Main Obstacles to SME Lending

    Obstacle for SME Financing in GCC and Non-GCC countries

    8Source: 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.

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    Fixed Collateral

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

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    Movable Collateral

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

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    SME Products in MEAN Region

     MENA banks provide the following SME Products:

    Products Offered for SMEs 

    GCC Banks Nom-GCC Banks

     

    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%

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    8) Insurance 19% 34%

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    SME Products in MEAN Region

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    Risk of SMEs Lending in MENA Region

    % of Banks responding that SME lending is more or equally risky

    than other business lines

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     The Selection Criteria used for targeting SMEs

    % of Banks indicating the selection criteria used for targeting SMEs

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     The Risk Technique used for SMEs in MENA 

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

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    IFC Financing to SMEs in the MENA Region

      IFC is working to develop solutions to close the micro,

    , ,

    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 re ion ith $140.7

    million in fiscal year 2010.

      IFC’s SME financial institution SME FI clients had68 thousand loans outstanding to SMEs by end of 

    2009, totaling $8.4 billion in this region.

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    IFC Financing to SMEs in the MENA Region

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    IFC Financing to SMEs in the MENA Region

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    IFC Financing to SMEs in the MENA Region

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    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 var es y country accor ng to Lega system, qu ty n t e 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

     Cor orate overnance rinci les difficult to enforce in famil SMEs.

     Structural rigidities and distortions:

     Macroeconomic imbalances

    -

      Legal, institutional and regulatory framework 

      Structure of the financial system

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    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.

    .

     Limited foreign ownership of banks in some countries, while somecountries have o ened u bankin sector to com etition.

     High cost of capital relative to OECD countries:

      Hi h interest rates used to com ensate for the lack of creditrelated information.

     Credit bureau lacking.

     Low overall pool of credit to the private sector in comparison withOECD countries.

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      Low credit ratios to GDP in a number of countries.

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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.

    s contr ute to creat ng o t e o opportun t es .

      SMEs receive about 6% to 10% of total lending.

      SMEs in ordan face a number of challen es that related to:

     Access to finance

      Lack of collaterals and guarantees  High risk 

      Lack of disclosure and transparency (especially for small

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    .

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    CBJ’s Definition of SMEs

     The Central Bank of Jordan (CBJ) has issued a formal

    definition for SMEs which include s ecific criteria as follows:

     For Small Enterprises:

      The firm shouldn’t be a public shareholding, ornsurance rm, or ro erage rm.

     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:

      e s ze o assets or sa es vo ume s ou e etween 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 

    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 primelending rate by one percent.

      The size of facilities granted for each customer shouldn’t exceed

     JD 1.5 million.

     Theses credit facilities shouldn’t 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 that aims at facilitating access to finance for SMEs,hence facilitating the development of banks’ SME activities, throughforming SME Financing Advisory Committee (SMEFAC).

     The SMEFAC is hosted by the ABJ and constituted of representativesof banks and relevant partner institutions involved and interested indevelo in their SME financin activities.

     The SMEFAC will play the role of a dialogue and advocacy platformbetween the banking sector and other relevant financial institutions,

    , , , ,non-banking financial institutions; it is aimed at advocating SMEfinancing 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 then s ry o n us ry an ra e.

     The program seeks to encourage financial institutions to facilitateloans to SMEs, particularly those in governorates. According to officialfigures, SMEs in Jordan receive only 10 per cent of the overall creditfacilities extended by commercial banks.

    Under the ro ram loan uarantees that ran e between $250 millionto $350 million will be allocated to cover around 85 percent of theoverall amount of the loan.

    Overseas Private Investment Corporation while the other $100 million will be through the International Finance Corporation.

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