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The Status of Bank Lending to SMEs in the Middle East and North Africa Region

Roberto Rocha's picture

Editor's Note: The following post was submitted jointly by Roberto Rocha, Senior Adviser, MENA, Rania Khouri, Director, Union of Arab Banks, Subika Farazi, Consultant, MENA, and Douglas Pearce, Senior Private Sector Development Specialist, MENA.

Small and medium-size enterprises (SMEs) are increasingly 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 the World Bank’s Enterprise Surveys suggest that access to finance for SMEs is more constrained in MENA than in other emerging regions, with only one in 5 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 Bank recently carried out a survey in cooperation with the Union of Arab Banks of SME lending in the region. We were fortunate to receive a very high response rate – we have data from 139 banks, which account for about half of MENA banks and almost two thirds of the banking system loans in 16 countries. The survey covered the following themes: i) strategic approach to SME lending, ii) main products offered to SMEs, iii) risk management techniques employed, and iv) SME lending data. This is the first dataset of its kind for this region, and builds on similar efforts in the Latin America and Caribbean region.

In a recent paper I coauthored with Subika Farazi, Rania Khouri and Douglas Pearce, we use this rich dataset to examine the status of SME lending in MENA. Most notably, we find that:

  • Banks regard the SME segment as potentially profitable, and most banks are already engaged in SME lending to some degree. However SME lending accounts for only 8 percent of total lending in the MENA region. (The figure below gives a country-by-country breakdown of SME loans as a proportion of total loans.)

  • More positively, bank targets for SME lending are significantly higher than current lending, indicating a significant potential supply side response if constraints can be eased.
  • Drivers for banks to lend to SMEs include: the potential profitability of the SME market, the saturation of the large corporate market, and the desire to diversify risk.
  • Principal constraints for SME lending include lack of SME transparency, poor credit information from credit registries and bureaus, and weak creditor rights.
  • Larger banks have not played a more significant role in SME finance in MENA than smaller banks per se, reflecting the presence of large wholesale banks in the MENA region. However, banks with a larger branch network do more SME lending.
  • State banks still play a notable role in financing SMEs in the MENA region, but they employ less sophisticated risk management systems than private banks.
  • Credit guarantee schemes are a popular form of support to SME finance in the region, and are associated with higher levels of SME lending. 

What does all this mean for policy? In the conclusion of the paper, we recommend that MENA governments should prioritize improvements in financial infrastructure, including greater coverage and depth of credit bureaus, improvements in the collateral regime, especially for movable assets, and stimulation of competition between banks and non-banks. Direct policy interventions through public banks, guarantee schemes, and other measures have played a role in compensating for MENA’s weak financial infrastructure but more sustainable structural solutions are needed.

While these solutions are implemented, MENA governments should also make an effort to improve the design and effectiveness of their policy interventions. This could include efforts to improve the design of guarantee schemes (e.g., better targeting and risk-related parameters), and efforts to improve the governance and risk management systems of state banks. 


Submitted by Michael Ehst on
It's great to have this data. One thought though - it's not really SMEs as a group that incease competitiveness, improve incomes, etc. It's a small group of high-growth SMEs -- what are sometimes called the "gazelles" (by the OECD among others) -- that have the potential to create competitive advantage, innovate, and grow into larger firms. If I recall, this is less than 10% of SMEs. I think the Bank should be doing more to focus on these companies when it focuses analysis and projects on SMEs. And beyond only access to finance, though I know that was the focus of this particular survey.

Submitted by The authors on
Michael, Thanks for your comments. We agree that different types of SMEs may have a different impact on innovation, productivity, and growth. Some Credit Guarantee Schemes around the world try to differentiate among these types of SMEs and introduce special programs for innovative/high tech SMEs. We are not aware of any rigorous evaluation of the impact of these special schemes. We believe more work needs to be done in assessing the impact of policy interventions in general, especially interventions that target those SMEs. However, that was not the focus of this paper. We are still at a more basic level, making an effort to raise basic data on SME lending and its basic determinants. We also recognize that non-bank forms of finance such as private equity are also needed to support these SMEs, although not too many countries provide the conditions for these private equity funds to succeed.

Submitted by William C. Fellows on
As I manage a Maghreb focused program in this very area, it is not a surprise that now Morococo is a stand-out relative to peers. I find the bald statement that larger banks have not played a role to be a bit disappointing (as well as the lack of clear comment on the tie between sustainability and *quality* of lending, yes state banks are lending more, e.g. in Algeria and Tunisia, but they're doing it on an effectively loss-making basis costed all-up as far as I can tell). In the Moroccan case, as your data show of course, large private banks (I generally consider the GBP to be effectively private) have played a large role. Evidently, of course, the Moroccan exception should not drive comment, but it's stand out deserves deeper comment and analysis. Particularly to teasing out the relationship between credit quality, reforms and investment in risk management (real investment, not for show and form)....

Submitted by Jailan on
Dear William, I manage a professional business management program to improve the business skills for SMEs in the MENA region and would like to know more about the Maghreb SME lending program so that we can exchange information to the benefit of the clients who borrow money to succeed in the world of business.

Submitted by The authors on
Dear William, Thanks for you thoughtful comments. We agree that the volume of lending does not necessarily translate into quality. Our survey does not include questions on Non-Performing Loans (NPLs), as banks are usually reluctant to provide this information. However, our survey results suggest that State banks have weaker credit and risk management systems, which lend support to your point. We would like to clarify, however, that Algeria was one of the few MENA countries that was not included in the sample.

Submitted by The authors on
Dear Omar: We have just completed the final and revised version. Will e-mail the paper to you in the next few days. We explored further the dataset and did further econometric testing. The results Note also that all the papers that are being produced under the MENA Financial Sector Flagship are being posted in a dedicated site inside the Bank's website that can be accessed externally. Best regards.

Submitted by Stefan Hepp on
Dear Roberto, I found your blog here and thought I use the opportunity to re-establish contact as we had been in frequent contact in past times when I was working for you as a consultant in the context of the World Bank missions regarding the introduction of occupational pension schemes in Hungary and later the Czech Republic and Slovenia. I hope this finds you well and look forward catching up with you. Best regards Stefan

Submitted by Bhawna L.N. on
Dear Roberto, I would like to read the paper - it seems very interesting, especially for the Middle East now. Can you email me the report. Thanks Bhawna

Submitted by Ryan Hahn on
@Bhawna, I've added a link to the final version of the paper to the blog post - you can find the paper, here: Best, Ryan

Submitted by Roberto R Rocha on
Dear Margaret: All the papers prepared for the MENA flagship report are available in the World Bank's MENA website. It should be straightforward to reach the site. Many of them are also published as Policy Research Working Papers. All the best. Roberto

Submitted by Rick Stevens on
Hi, Inviting one & all for my upcomming forum “Middle East SME Forum 2011" which will take place on the 3rd & 4th of October in Abu Dhabi, UAE. It will be my pleasure if you participate & nominate officials from your organization. This will be a 5 star event bringing together 100 Senior level Banking professionals as well as Entrepreneurs from leading Small Medium Enterprises from across the world. Among organizations that are participating: Dubai SME100, National Bank Of Abu Dhabi, Abu Dhabi Department Of Economic Development, Zamil Group, Mohammed Bin Rashid Establishment for SME Development, Jordan Enterprise Development Corporation, Saudi Industrial Development Fund, Citibank, Al-Kadi Commerce & Industry, Jacky's Group Of Companies, Ajman Bank, RAK Bank, Bank Of Bahrain & Kuwait, Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Arab National Bank, Gulf International Bank, Qatar National Bank, Bank Al Jazira, Standard Chartered, Commercial Bank Of Dubai, Qatar Islamic Bank, Bank Al Bilad, Dubai Islamic Bank, National Bank Of Kuwait and many others. The event is in October; however looking at the Return On Investment (ROI) that you can benefit from, most organizations are sending teams of 3-8 delegates to the forum. Hence, we are currently approaching the final stages of the registration and I will need your decision in this regards as soon as possible. Kindly note, on confirming your attendance before July 20th, you will be entitled for a 15% discount as Early Bird on the participation. Awaiting a prompt response. Regards, Rick Stevens Project Manager Fleming Gulf FZE No.74 Patel Rama Reddy road, Next to Al Maz Software Domlur layout Bangalore - 560071, INDIA Tel: +91 80 39919000 Mobile: +91 96 2030 9669 Fax: +91 80 39919099 E Mail: Website:

Submitted by Jailan on
I am very sorry to miss that event and would like to know when is the next Forum taking place and where in the Middle East?

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