Smes: Catalysts for Economic Growth in Mideast and Central Asia

An International Monetary Fund (IMD) report issued this year has underscored the role played by small and medium-sized enterprises (SMEs) as catalysts for economic growth and employment in the Middle East and Central Asia.

The study, entitled “Financial Inclusion of Small and Medium Enterprises in the Middle East and North Africa, Afghanistan and Pakistan (MENAP) and Central Asia (CCA)”, shows how small and medium-sized enterprises can act as catalysts for both macroeconomic growth and employment in the economies of these regions.

It also outlines the prerequisites needed to effectively include SMEs in their economies.

The study holds relevance for Egypt, since the Central Bank of Egypt (CBE) launched a LE200 billion finance initiative to support SMEs with similar goals in 2016.

Under the initiative, Egypt’s commercial banks are required to allocate 20 per cent of their loan portfolios to SMEs.

It came within the context of policies aimed at boosting macroeconomic growth and creating private-sector jobs. The CBE’s SME initiative aims to provide four million new jobs, according to a statement issued in 2016.

According to the IMF report, in the countries of the Middle East and Central Asia SMEs, in line with world averages, represent about 96 per cent of all registered companies and employ about half of the total labour force.

Despite this, the average share of SMEs in total bank lending in the countries of these regions totals no more than approximately seven per cent, considered to be one of the lowest in the world.

In some Gulf Cooperation Council (GCC) countries in the Arab Gulf the percentage of bank lending for SMEs falls as low as two per cent.

According to a World Bank Enterprise Survey, about 32 per cent of firms in the MENAP region and 18 per cent in the CCA region report access to credit as a major constraint. This compares with a world average of 26 per cent.

The financial inclusion index for SMEs, a measure of their role in the wider economy, shows that the MENAP countries lag behind the rest of the world, with the CCA region performing slightly better.

They also lag behind other countries with similar levels of economic development.

The importance of boosting the low rates of SME inclusion in these economies is underscored by the fact that small and medium-sized enterprise growth holds significant macro-financial benefits for the economy, and in some cases it can boost a country’s economic growth by one per cent, according to the report.

SME growth could also potentially create about 16 million jobs by 2025 in the Middle Eastern and Central Asian economies.

A Financial Inclusion Plan for SMEs was endorsed at the 2010 G10 Summit in Seoul as a result, that made recommendations based on the experience of countries that have been successful in boosting SME funding through bank credit.

Where this has taken place, it has been due to the existence of several prerequisites, including macro-economic stability, a limited public-sector size that does not divert the funding available for SMEs, financial sector soundness, a competitive banking sector, and, “more broadly, a competitive and open economy that can boost SME investment and demand for credit”, the summit said.

An institutional environment featuring strong governance, financial regulations, and supervisory capacity and credit information availability are also needed for SME growth, the report says.

Another important prerequisite for SME growth is a supportive business environment providing modern collateral and insolvency frameworks and legal systems that enable the adequate enforcement of property rights and contracts.

In addition to bank credit, alternative channels for SME funding can also be provided by capital markets and fintech (financial technology tools). Although these are still nascent in the MENAP and CCA regions, they could ultimately play an important role in the funding of SMEs.