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The Status of Bank Lending to Small and Medium Enterprises

The Results of a Joint Survey of the Union of Arab Banks and the World Bank

Small and medium-size enterprises (SMEs) have increasingly become a priority for policymakers in the Middle East and North Africa (MENA) region, who see SMEs as key to solving the challenge of improving competitiveness, raising incomes, and generating employment.

Data from World Bank Enterprise Surveys suggest that access to finance for SMEs is more constrained in the Middle East and North Africa (MENA) than in other emerging regions, with only one in five SMEs having a loan or line of credit. Yet, until recently there has been no comprehensive survey of the supply of SME finance in MENA. SME policymakers may therefore lack comprehensive information to design reforms, while SME finance providers may not have access to valuable market information to inform design of SME financial services and delivery channels.

To fill this knowledge gap, the World Bank carried out a survey in cooperation with the Union of Arab Banks on SME lending in the region. About half of MENA banks (139 banks) responded, representing almost two thirds of the banking system loans in 16 countries. Although most banks are already engaged in SME lending to some degree, it accounts for only 8 percent of total lending in the MENA region. Larger banks have not played a more significant role in SME finance in MENA than smaller banks per se; however, banks with a larger branch network do more SME lending. SME financing is attractive to banks because of its potential profitability and it is a way of diversifying risk and avoiding the saturation of the corporate market.

Among the principal constraints for SME lending is the lack of SME transparency, poor credit information from credit registries and bureaus, and weak creditor rights. If constraints can be addressed, lending can potentially reach bank targets of 21 percent. State banks still play an important role in financing SMEs in the MENA region, but they use less sophisticated risk management systems than private banks. On another hand, credit guarantee schemes are a popular form of support to SME finance in the region, and are associated with higher levels of SME lending. 
The paper concludes that MENA policy makers should prioritize improvements in financial infrastructure, including greater coverage and depth of credit bureaus, improvements in the collateral regime (especially for movable assets), and increased competition between banks and also non-banks. Weaknesses in insolvency regimes and credit reporting systems should also be alleviated. Direct policy interventions through public banks, guarantee schemes, lower reserve requirements and subsidized lending and other measures have played a role in compensating for MENA’s weak financial infrastructure, but more sustainable structural solutions are needed.

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