Middle East needs SME lending initiatives, says IMF

Reading Time: 3 minutes

Middle East SMEsMicro, small and medium enterprises (MSMEs) in the Middle East and North Africa present a large, untapped market for financial institutions willing to help cover a funding gap estimated at $180 billion, the director for MENA at International Finance Corporation (IFC) said according to a Zawya report.

Mouayed Makhlouf said there were between 19 million to 23 million MSMES in the region, representing around 80 to 90 per cent of businesses, but that banks and financial institutions were reluctant to invest in the sector due to high risk of debt default. In addition, studies have shown that around 20 to 25 per cent of MSMEs prefer Shariah-compliant products.

“Access to finance is one of the greatest challenges facing MSMEs across the globe, and particularly for MENA where nearly 63 per cent of the MSMEs do not have access to finance. The total ‘formal’ financing gap for SMEs in MENA is estimated at $160 billion to $180 billion,” Makhlouf said.

“Not only is there a large untapped market opportunity but the segment is growing at a rapid pace, which can allow financial institutions to serve this segment and enhance their commercial viability in SME operations.”

Institutional lenders in MENA would do well to explore the business potential of SMEs as the revenue pool has reached $6 billion, growing 18 per cent annually, and is likely to hit $15 billion in the next five years, according to IFC estimates.

The expansion has been driven by high GDP growth in emerging markets, increased penetration of a large number of un-served and under-served SMEs, and demand for higher-revenue banking products.

Makhlouf said the three biggest challenges facing the sector are the limited capacity of financial institutions, the absence of a supportive business environment and lack of entrepreneurial business skills. He added that lenders can mitigate risks associated with SMEs by establishing risk management frameworks, setting up strong SME-dedicated divisions and offering innovative credit management solutions for startups.

“A robust credit and risk management framework, not mitigating through collateral, would provide the necessary safeguards,” said Makhlouf, adding that this would entail a strong understanding of the SME market and differentiation of credit policy parameters from existing corporate or retail banking policies.

He said banks could also define trigger actions against early warning indicators, conduct stress testing and set up a dedicated SME collections outfit for managing marginal and underperforming clients.

Another approach, according to the IFC director, is to build for scale. “Many banks build their SME businesses on a case-by-case lending approach, which is not geared to achieve scale. So any early stage weakening, which is likely to happen owing to the nature of this business segment, invariably discourages the banks to go further.”

“Adopting program lending approaches and managing and measuring risk on a portfolio basis would help banks understand and manage segment risk dynamics better, and incorporate the required policy and risk management checks.”

Among suggested credit management solutions are: credit scorecards, which incorporate the SME owner’s personal credit history; psychometric-based scorecards, which assess an entrepreneur’s fundamental intellectual and psychological characteristics; and predictive behavioral scorecards, which predict the probability of a business turning sour.

Across the MENA region, the UAE and Qatar are considered among the most favorable markets for SMEs. In its Doing Business Report, the World Bank ranked UAE and Qatar 23rd and 48th among 189 countries worldwide on the ease of doing business for 2014.

Makhlouf said that while the UAE and Qatar are both Gulf Arab markets, their SME banking landscapes differ in terms of scale, complexity, sector concentrations and lending practices. In the UAE, SME financing is estimated at nearly 4 per cent, while in Qatar it is less than 1 per cent – lower than the MENA average of 8% and much lower than high-income countries’ average of 22 per cent.

He said the main hindrance was an unsupportive business environment and that there was a need to set up credit bureaus, collateral registries, and central policy making and execution for the SME sector.

“Lately [however], there has been an increased interest among regulators and public sector players. The SME prospects for both UAE and Qatar are positive in the near-term (with GDP growth projected at 4 to 6 per cent for 2014) and in the long-term as the World Expo 2020 in the UAE and the 2022 FIFA World Cup in Qatar would help bring further impetus.”

Some banks in the UAE have focused on SMEs and built relevant portfolios, while others have set their sight on SME banking outfits with dedicated units and products. In Qatar, meanwhile, some banks have set up teams and aligned resources to step up SME lending.

“We can certainly categorise this as an increased interest, but there is still a higher reliance on traditional approaches, collateral-based lending focus and conventional tools, which restrict banks from building scalable, efficient and market outperforming SME banking operations,” Makhlouf said.

As a result, IFC believes there is still a need to enhance core SME banking competencies in the areas of business model design, segmentation, credit and risk management, sales and delivery channels, products and services, systems and tools, team expertise and non-financial services.

Do you like this post?
  • Fascinated
  • Happy
  • Sad
  • Angry
  • Bored
  • Afraid

Reading Time: 3 minutes

Micro, small and medium enterprises (MSMEs) in the Middle East and North Africa present a large, untapped market for financial institutions willing to help cover a funding gap estimated at $180 billion, the director for MENA at International Finance Corporation (IFC) said according to a Zawya report.

Reading Time: 3 minutes

Middle East SMEsMicro, small and medium enterprises (MSMEs) in the Middle East and North Africa present a large, untapped market for financial institutions willing to help cover a funding gap estimated at $180 billion, the director for MENA at International Finance Corporation (IFC) said according to a Zawya report.

Mouayed Makhlouf said there were between 19 million to 23 million MSMES in the region, representing around 80 to 90 per cent of businesses, but that banks and financial institutions were reluctant to invest in the sector due to high risk of debt default. In addition, studies have shown that around 20 to 25 per cent of MSMEs prefer Shariah-compliant products.

“Access to finance is one of the greatest challenges facing MSMEs across the globe, and particularly for MENA where nearly 63 per cent of the MSMEs do not have access to finance. The total ‘formal’ financing gap for SMEs in MENA is estimated at $160 billion to $180 billion,” Makhlouf said.

“Not only is there a large untapped market opportunity but the segment is growing at a rapid pace, which can allow financial institutions to serve this segment and enhance their commercial viability in SME operations.”

Institutional lenders in MENA would do well to explore the business potential of SMEs as the revenue pool has reached $6 billion, growing 18 per cent annually, and is likely to hit $15 billion in the next five years, according to IFC estimates.

The expansion has been driven by high GDP growth in emerging markets, increased penetration of a large number of un-served and under-served SMEs, and demand for higher-revenue banking products.

Makhlouf said the three biggest challenges facing the sector are the limited capacity of financial institutions, the absence of a supportive business environment and lack of entrepreneurial business skills. He added that lenders can mitigate risks associated with SMEs by establishing risk management frameworks, setting up strong SME-dedicated divisions and offering innovative credit management solutions for startups.

“A robust credit and risk management framework, not mitigating through collateral, would provide the necessary safeguards,” said Makhlouf, adding that this would entail a strong understanding of the SME market and differentiation of credit policy parameters from existing corporate or retail banking policies.

He said banks could also define trigger actions against early warning indicators, conduct stress testing and set up a dedicated SME collections outfit for managing marginal and underperforming clients.

Another approach, according to the IFC director, is to build for scale. “Many banks build their SME businesses on a case-by-case lending approach, which is not geared to achieve scale. So any early stage weakening, which is likely to happen owing to the nature of this business segment, invariably discourages the banks to go further.”

“Adopting program lending approaches and managing and measuring risk on a portfolio basis would help banks understand and manage segment risk dynamics better, and incorporate the required policy and risk management checks.”

Among suggested credit management solutions are: credit scorecards, which incorporate the SME owner’s personal credit history; psychometric-based scorecards, which assess an entrepreneur’s fundamental intellectual and psychological characteristics; and predictive behavioral scorecards, which predict the probability of a business turning sour.

Across the MENA region, the UAE and Qatar are considered among the most favorable markets for SMEs. In its Doing Business Report, the World Bank ranked UAE and Qatar 23rd and 48th among 189 countries worldwide on the ease of doing business for 2014.

Makhlouf said that while the UAE and Qatar are both Gulf Arab markets, their SME banking landscapes differ in terms of scale, complexity, sector concentrations and lending practices. In the UAE, SME financing is estimated at nearly 4 per cent, while in Qatar it is less than 1 per cent – lower than the MENA average of 8% and much lower than high-income countries’ average of 22 per cent.

He said the main hindrance was an unsupportive business environment and that there was a need to set up credit bureaus, collateral registries, and central policy making and execution for the SME sector.

“Lately [however], there has been an increased interest among regulators and public sector players. The SME prospects for both UAE and Qatar are positive in the near-term (with GDP growth projected at 4 to 6 per cent for 2014) and in the long-term as the World Expo 2020 in the UAE and the 2022 FIFA World Cup in Qatar would help bring further impetus.”

Some banks in the UAE have focused on SMEs and built relevant portfolios, while others have set their sight on SME banking outfits with dedicated units and products. In Qatar, meanwhile, some banks have set up teams and aligned resources to step up SME lending.

“We can certainly categorise this as an increased interest, but there is still a higher reliance on traditional approaches, collateral-based lending focus and conventional tools, which restrict banks from building scalable, efficient and market outperforming SME banking operations,” Makhlouf said.

As a result, IFC believes there is still a need to enhance core SME banking competencies in the areas of business model design, segmentation, credit and risk management, sales and delivery channels, products and services, systems and tools, team expertise and non-financial services.

Do you like this post?
  • Fascinated
  • Happy
  • Sad
  • Angry
  • Bored
  • Afraid