The Middle East and North Africa (MENA) region is facing the urgent task of creating jobs for the 20 million young people expected to join the workforce by 2025. Small and medium enterprises (SMEs) could play an instrumental role in tackling this challenge, given their potential to create jobs and foster innovation. Unfortunately, SMEs in the region continue to face important obstacles, not least limited access to finance - an area where the region has the largest gap in the world.

A growing priority

Several surveys show access to finance as the main impediment to SMEs in the region. The results are not surprising. While SMEs in the MENA represent about 96% of registered companies and about half of employment, they account for only 7% of total bank lending - the lowest level in the world. For comparison, lending to SMEs represents 16% of all bank loans in Asia Pacific. The good news is that policy-makers in MENA increasingly recognize the significance of financial inclusion, and are looking for policy solutions to close the gap.

Potential benefits

A recent analysis by the International Monetary Fund shows there is considerable scope to increase SME access to finance in the MENA region, and that doing so would yield substantial macrofinancial benefits. It finds that closing the region’s financial inclusion gap, relative to the average of emerging markets and developing economies, could boost annual growth rates by up to 1% over the medium term.

Estimates of gains in employment and labour productivity growth using firm-level data point to potentially higher GDP growth gains. This in turn would help create about 15 million new jobs by 2025. In addition, the paper shows that greater SME financial inclusion may improve the effectiveness of macroeconomic policies, including tax collection efficiency and monetary policy transmission.

Promoting bank credit to SMEs

The analysis shows that SMEs would enjoy greater access to finance when there is:

- Greater macroeconomic stability, which is associated with stronger private sector confidence and increased demand and supply of credit, including to SMEs

- Stronger banking sector soundness and resilience, as weak bank asset quality appears to hamper SME financial inclusion

- Lower public sector size, given the risk that a large public sector may crowd out credit to SMEs or create an uneven playing field for SMEs, exposing them to unfair competition

- Greater economic competition more broadly, since the concentration of economic activity in the public sector or in a limited number of large firms is likely to result in barriers to entry and lower SME productivity

- Better availability of quality credit information, which is an essential ingredient of the management of SME credit risk exposures

- Stronger legal and institutional frameworks related to property rights, contract enforcement, and collateral and insolvency regimes, which are all key conditions for banks to offer loans with reasonable terms and conditions

Alternative sources of finance to SMEs

While bank credit remains the most predominant source of SME finance, other financing channels can also help serve the needs of SMEs. These include capital markets, such as SME-specific equity market segments and fintech. The latter could be a potential game-changer, both by reducing some of the above constraints on bank lending and by opening new financing sources for SMEs, such as through crowd-funding, seed capital and peer-to-peer electronic platforms.

Egypt, Jordan, Lebanon and the UAE, which host three quarters of the start-ups in the Middle East, North Africa, Afghanistan and Pakistan, have already established large fintech accelerators. All these alternative channels of SME finance require putting in place specific legal and regulatory environments.

Taking a holistic policy view

Financial inclusion has been at the top of policy agendas in a number of countries, including Egypt, Jordan and Tunisia. However, governments and central banks have often relied on direct public intervention to boost SME access to finance. There is an increasing realization that unlocking SME financial inclusion requires a range of reforms, from macrofinancial conditions and the size of the public sector to institutional and regulatory issues related to competition, credit information, property rights and solvency frameworks.

In other words, holistic policy strategies, as opposed to partial measures, are needed to put in place conditions for meaningful, safe and sustainable SME financial inclusion. Such holistic approaches can trigger a virtuous circle of greater SME transparency and reduced informality, bringing about broader economic benefits.

It is on this basis that the IMF, together with other stakeholders including the World Economic Forum, will continue to support policy-makers in the MENA in their efforts to enhance SME financial inclusion.