Fourth Industrial Revolution

Improving access to finance for businesses in MENA region

Two middle eastern business women.

Greater financial inclusion is needed in the MENA region. Image: Cedric Fauntleroy, Pexels.

Adeeb Ahamed
Managing Director, Lulu Financial Group
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Fourth Industrial Revolution

  • Only 8% of bank lending is available to small and medium enterprises in the Middle East and North Africa.
  • Public-private collaboration is needed to establish a uniform regulatory framework to help create more job opportunities and build a resilient economy.
  • The Regional Action Group for the Middle East and North Africa proposes businesses in the region become part of a singular credit readiness system.

An Actionable Idea of a Member of the Regional Action Group for the Middle East and North Africa.

The Middle East and North Africa (MENA) region is at a critical juncture, facing the imperative to create 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, foster innovation and contribute to growth.

MENA-based SMEs represent 96% of registered companies in the region, and are among the lowest recipients of bank loans globally. This lack of access to finance severely impacts SME growth and employment.

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Not only lending for operations is limited in such a way, but lending for capital expenditures is also severely restricted.

One reason for this can be found in the lack of an organized audit or regulatory framework through which to gauge SMEs’ credit worthiness and risk. If SMEs want to grow and create jobs, an ecosystem needs to be put in place that assures confidence in their financial health. Such an ecosystem will benefit the growth of the private sector for the greater good of the economy.

How can SME’s credit worthiness be established?

The first step involves setting up a uniform regulatory framework for SMEs, which makes them adhere to a singular credit readiness system. Through a region-wide coalition, stakeholders such as government and related entities (GREs), auditors, financial institutions and private investors will be able to standardize the regulatory framework for SMEs to become credit worthy. This will encourage SMEs to formalize their bookkeeping process and adhere to the financial readiness expected by formal banking systems for better access to capital expenditure and supply chain finance.

The framework should build upon previously identified conditions, such as strong legal and property rights, contract enforcement, and collateral and insolvency regimes. Estimates of gains in employment and labour productivity growth using firm-level data point to potentially higher GDP growth gains. This in turn could create 15 million new jobs by 2025, as outlined in a report by the IMF’s Middle East and Central Asia Department.

Greater SME financial inclusion will improve the effectiveness of macroeconomic policies, including tax collection efficiency and monetary policy transmission – two areas which the MENA region could benefit from.

Piloting a solution for better access to capital

The pilot proposed to set this actionable idea in motion aims to be industry agnostic, to take a holistic approach to the problem and allow private investors and government-led investment vehicles, along with PEs, to have a tangible impact.

The regulatory framework will consider the inputs from various interconnected government entities, established SMEs (and MSMEs) and banks, and initially focus on a sample size of 1,000 companies.

The pilot phase will ascertain the readiness of these selected SMEs to access funds in a real world or demo-day type environment, connecting them to potential financial institutions, including global and regional banks.

Graphic illustrating how a uniform regulatory framework for small and medium-sized enterprises (SMEs) can be established. Source: LuLu Financial.
Graphic illustrating how a uniform regulatory framework for small and medium-sized enterprises (SMEs) can be established. Source: LuLu Financial.

To achieve real scalability, it is necessary that the framework is tech-driven, allowing a single plug and play network for SMEs and other participating stakeholders, such as government representatives, banks and other financial institutions, investors, etc. to collaborate seamlessly and ensure adherence to a process-driven lending system.

Such a proposition requires the tokenization of assets by the application of blockchain technology and it is in this area where public and private stakeholder can work together towards achieving greater inclusion of SEMs into economic life.

SMEs can therefore play an instrumental role in tackling the region’s chronic unemployment challenge, foster innovation and contribute to growth.

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Fourth Industrial RevolutionBanking and Capital Markets
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