Sustainable Development

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Financial inclusion, which encompasses the effective access to and use of available, affordable, convenient, quality and sustainable financial services, is central to poverty reduction and sustainable development.

In fact, access to finance underpins the international community’s development agenda as articulated in the United Nations Sustainable Development Goals for 2030.

This need is particularly evident in the MENA region, which has some of the highest unemployment rates in the world and rampant political, economic and social instability.

According to the World Bank, MENA also has the lowest bank loan usage of all regions except sub-Saharan Africa, and MENA small and medium-sized enterprises (SMEs)utilize equity investments at the lowest rate in the world.

Photo by <a href="https://unsplash.com/@lucabravo?utm_source=unsplash&utm_medium=referral&utm_content=creditCopyText">Luca Bravo</a> on <a href="https://unsplash.com/s/photos/development?utm_source=unsplash&utm_medium=referral&utm_content=creditCopyText">Unsplash</a>

Financial inclusion, which encompasses the effective access to and use of available, affordable, convenient, quality and sustainable financial services, is central to poverty reduction and sustainable development.

In fact, access to finance underpins the international community’s development agenda as articulated in the United Nations Sustainable Development Goals for 2030.

This need is particularly evident in the MENA region, which has some of the highest unemployment rates in the world and rampant political, economic and social instability.

According to the World Bank, MENA also has the lowest bank loan usage of all regions except sub-Saharan Africa, and MENA small and medium-sized enterprises (SMEs)utilize equity investments at the lowest rate in the world.

The SME Sector

The role of the SME sector is significant in terms of its contribution to GDP and employment generation, particularly in developing economies.  According to the IFC, formal SMEs contribute up to 45 percent of employment and up to 33 percent of GDP in developing economies.

 

Economic Contribution

These numbers are significantly higher when taking into account the estimated contributions of SMEs operating in the informal sector.  More importantly, in high income countries, SMEs contribute nearly 64 percent to the GDP and 62% to employment, making the case that the SME sector is the engine of economic prosperity.

Start Ups

  • Informal/ not registered; Start Ups, MSMEs
  • < 10 employees
  • Appeals to microfinance and government funds; donors
  • Business skills may or may not exist
  • Seeking < US$ 50K

Missing Middle SMEs

  • Formal/ registered small and medium enterprises
  • 6-150 employees
  • Unable to secure traditional financing (lack of collateral, track record, and/or guarantors)
  • Lack of business skills necessary for viable long-term growth
  • Seeking US$ 50K - 2M in additional finance

Large Businesses

  • > 150 employees
  • Appeals to private equity, venture capital; traditional finance, banks, etc.
  • Business skills contribute to efficiency, scale, and sustainability
  • Seeking  > US$ 2M
  • High access to capital

From: Citi Foundation / Shell Foundation, SMEs in MENA / Leveraging Growth Finance for Sustainable Development (2013)

The Financial Infrastructure Gap

  • A recent World Bank/Union of Arab Banks survey of over 130 MENA banks shows that only 8 percent of lending goes to SMEs across MENA, and even less in GCC countries at 2 percent.

  • Strengthening financial infrastructure is considered a key consideration for the region according to the World Bank. Other measures should include improving legal and regulatory framework, auditing, and accounting standards, credit bureaus, collateral, and insolvency regimes. Data availability is still a problem, and there is a need for an effective data collection framework at the national level.

  • The Global SME Finance Awards 2019 recognized and celebrated financial institutions and fintech companies for their outstanding achievements in delivering exceptional products and services to their SME clients. Endorsed by the GPFI, the Global SME Finance Awards provide an opportunity for institutions to showcase and share their good practices and knowledge and to learn from them!

Private Sector Employment

SMEs account for a very high share of private sector employment in the MENA region, particularly in countries with large informal sectors.  According to statistics, SMEs typically average between 10% and 40% of all employment in MENA.  However, employment in SMEs is likely to be significantly under-estimated in official records.  The typical non-GCC MENA country is estimated to employ as much as 67% of labor informally.

 

Micro, Small, & Medium Enterprises

The majority of enterprises in MENA are Micro and Small and Medium Sized Enterprises (MSMEs) estimated at 19-23 million (formal and informal) in number and comprising 80-90% of total businesses in most countries.  Access to finance is one of the greatest challenges facing MSMEs globally, but particularly for MENA where nearly 63 percent of the MSMEs do not have access to finance. 

SME credit gap

The total financing gap for MSMEs in MENA is estimated at $210 to $240 Billion (of which the formal MSME finance gap is estimated at $160-$180 billion.

Indicators of the SME Finance Environment in the Investment Countries

Selected Indicators of SME Access to Finance (%) Egypt Jordan Morocco Palestine Tunisia
Firms identifying finance as a major constraint 31 33 25 38 27
Firms having no checking or savings account 27 8 4 13 3
Firms having no current bank loan or line of credit 95 75 43 81 41
Proportion of loans requiring collateral 100 91 84 67 91
Average collateral needed for a loan (% of loan value) 316 144 138 91 245
Percent of firms using a bank for working capital 7 33 47 18 51
Percent of firms using a bank for capital expenditures 3 62 31 9 24
Firms using sales of equity to finance investments 0 5 6 3 7

MSME Financing Gap

Country Number of MSMEs Current Supply MSME Finance Gap MSME Finance gap/GDP
Egypt 2,453,567 $ 2,819,748,677 $ 46,722,358,190 14%
Jordan 156,060 $ 2,308,450,774 $   6,582,119,054 18%
Morocco 1,410,000 $ 7,305,641,193 $ 36,673,779,968 37%
Tunisia 601,416 $ 6,005,002,488 $   6,873,526,885 16%

Source: “MSME Finance Gap: Assessment of the Shortfalls and opportunities in financing micro, small and medium enterprises in Emerging Markets,” International Finance Corporation, 2017.

*Note: The study defines micro enterprises as those with less than 10 employees and MSMEs as those with less than 250 employees.  Also, please note that data on Palestine was not available.

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