IFC data from over a decade ago found that in MENA only 8% of total bank lending goes to SMEs, the lowest share of any region globally. The macro environment of the last few years has meant only modest progress has been made in this area. Even in markets like Saudi Arabia, where authorities are actively pushing to expand SME finance, these enterprises still account for only about 9% of total banking credit – well below the 20% target set for 2030.
One obvious issue is that higher interest rates have raised the hurdle for borrowers. Businesses need bigger returns to justify borrowing, and raising prices only gets them so far. “At some point, consumers just don’t follow you,” says Francis Malige, managing director, head of financial institutions business group at the EBRD. “When interest rates are very high and inflation is very high, SMEs either lose margins or they lose customers. That’s the dilemma they face.”
The result has been a slowdown in SME financing activity across much of the MENA region, particularly those with high inflation and weaker currencies. Commercial International Bank (CIB) – Egypt’s largest private sector lender – has noticed a clear shift in SME behaviour. “They are becoming more cautious about borrowing due to high interest rates,” says Islam Zekry, group chief finance and operation officer at CIB. “There has been a shift towards short-term financing tools, including working capital loans, to meet their needs.”
Reducing risks
MENA lenders can find it challenging to bank SMEs at the best of times. A recent report from the Citi and Shell foundations highlighted a “missing middle” of SMEs that have matured from the initial start-up phase but lack sufficient collateral or financial records to qualify for bank loans. This segment makes up anywhere from 40-70% of the SME market in MENA countries, according to the report.
Inflation and rising borrowing costs have increased default risks, prompting the region’s banks to impose stricter credit assessments and prioritise industries with stable cash flows. This is where development finance institutions can step in. In countries like Egypt, the issue is not liquidity, it is risk appetite. De-risking instruments like those offered by the EBRD are crucial for enabling banks to extend more credit to SMEs – and to do so over longer tenors.
Across its MENA operations the EBRD offers a mixture of risk sharing facilities – designed for individual loans to larger SMEs – and portfolio risk sharing on a collection of granular SME loans. “This is proving successful,” says Malige. “We’ve now signed two agreements with two banks for €20 million and we have a few more in discussion for another €100 million in the immediate pipeline.”
CIB has tapped EBRD risk-sharing arrangements and has also signed similar agreements with the US International Development Finance Corporation and the Dutch development bank FMO.
Demanding digitisation
Another clear trend in SME finance has been a move away from collateral-heavy lending towards more innovative, cashflow-based products. Banks like CIB are using supply chain finance programmes to allow SMEs to secure funding based on transaction activity and supply chain performance.
Advisory services and training from partners like the EBRD help make this approach viable. “A lot of entrepreneurs are very good at what they do – whether it’s running a bakery or making furniture – but they are not necessarily very good at preparing proper cashflow forecasts or having a dialogue with their bank on the basis of solid financials,” says Malige. “We help them to do that.”
Perhaps the most promising avenue for improving SME finance lies in digitalisation. Banks are leveraging technology and investing in digital credit evaluation tools that draw on new data sources to assess creditworthiness more efficiently. “These efforts are focused on developing efficient assessment models, ensuring that financial solutions are tailored to the specific needs of SMEs,” says Zekry.
SME clients are undergoing their own digital transformation. Recent research from consultancy EY found that roughly two-thirds of MENA SMEs surveyed are digitising their processes. An even higher proportion want digital-first credit processes. Almost half the SMEs surveyed said they were frustrated by paperwork and manual onboarding.
Malige stresses that digital finance is more than just online banking. “It’s about better integration between banks and SMEs. If the bank can plug into real-time data on orders or inventory, it can respond more quickly – providing more working capital or alerting the SME if their financials are going in the wrong direction.”
Despite these innovations, a significant financing shortfall remains – unmet SME credit demand across the MENA region exceeds $40 billion. This represents both a challenge and an opportunity for banks. EY research suggests the unmet credit demand across MENA region SMEs represents a potential $7bn profit pool. But banks are not the only ones offering funding. EY’s survey found that 39% of SMEs look to fintech and big tech firms for finance. In the UAE, 30% of SMEs are already considering non-traditional sources, the survey found.
Closing the SME financing gap will be critical to sustaining non-oil growth, especially amid high interest rates. SMEs will favour lenders that can combine speed with flexibility and understanding of their business needs. Institutions that innovate fastest – and smartest – will be best placed to narrow this gap.
