SME Landscape in MENA: Challenges and Potential Growth

The Present Status and Future Prospects for SMEs in MENA Islamic Corporation for the Development of the Private Sector ( ICD ) Member of the Islamic Development Bank (IsDB) Group February 2017

Introducing ICD The Private Sector Arm of IsDB Group Islamic Corporation for the Development of the Private Sector ( ICD ) ICD is rated as AA by Fitch and also, Moody has given a stable outlook to ICD and has rated it as Aa3/P-1 IsDB is a AAA multilateral development financial institution based in Jeddah, Kingdom of Saudi Arabia ICD ICD was established in 1999 with a paid up capital of US$799 mn Shareholders: IsDB 47%, Member Countries of IsDB 44% and Public Financial Institutions 9% Capital Base and Shareholdin g Islamic Corporation for Insurance of Investments and Export Credits Islamic Research and Training Institute ICD is a major player in the development & promotion of the private sector as a vehicle for economic, social growth and prosperity in its member countries International Islamic Trade Finance Corporation Private Sector Focus

The SME Sector: A Global View SMEs are engines of growth that contribute to effective markets and reduce poverty in countries where populations are growing rapidly and jobs are needed desperately GDP Contribution of SME and Informal Sector (%) GDP Contribution to Formal Employment (%) 100%? 100%? Residual? 31%? 36%? 37%? 80%? 80%? Informal? 62%? 54%? 60%? 60%? 13%? 30%? SME? Sector? 33%? 40%? 40%? 47%? 51%? 20%? 20%? 39%? 16%? 0%? 0%? Low-income? Middle-income? High-income? Low-income? Middle-income? High-income? Source: World Bank Research; 2013 SMEs have been widely recognized as effective and successful in developed markets, responsible for much of growth in new jobs, and contribute to more than 50% of GDP and over 60% of employment 2

SME Landscape in MENA SMEs are a vital component of MENA economies, but face barriers to reach their full potential SMEs represent over 90% of the registered companies. SME activity becoming an increasingly significant contributor to GDP and job creation. Yet they still don t have the same significance as their counterparts in developed economies SMEs typically account for 20 40% of all employment in MENA. Typical non-GCC MENA country is employs as much as 60 70% of labor informally, although only 6% of GCC labor is informal SMEs in Egypt, Lebanon and UAE are important contributors to GDP, accounting for 80%, 99% and 60% respectively, but contribution is significantly lower in KSA, Kuwait, Qatar and Oman MENA is witnessing a transformation into an active SME structure with every GCC country establishing specialized bodies and developing regulations and programs to support and nourish them However, access to finance is one of the greatest challenges facing SMEs in MENA, where over 50% of the SMEs do not have access to finance Total financing gap for SMEs in MENA is estimated at US$210 240 billion 3

Strategic Importance of SMEs in MENA More so than any other region in the world, the MENA needs to create employment opportunities, especially for youth of 15 30 years of age, post the oil price decline era SMEs important to the region for two key reasons: Youth Unemployment Rate (%) Job creation for a large and young unemployed population; and Private sector development and diversification of economies While region is blessed with a young population, it also has one of the highest unemployment rates in the world Public sector still the main source of employment in MENA, but this is not sustainable With public sector job creation plateauing, SMEs will compose the next wave of employment Source: IFC; 2013 Studies claim that MENA needs to create over 80 million jobs by 2030 to lower unemployment rates. Only the private sector has the capacity to create this 4

Key Challenges facing SMEs in MENA MENA region needs to be more proactive in cultivating a business environment that is conducive to sustain SME growth A survey covering over 130 MENA banks shows that only 8% of lending goes to SMEs across MENA, and even less in GCC countries at 2% SME finance in MENA is restricted by the lack of an enabling environment. Regulations are insufficient, financial infrastructure is inadequate, lending capacity and tools are lacking and the availability of collateral is scarce. SMEs need to improved management skills and financial transparency. Most banks are not equipped to offer sustainable and profitable SME banking products Average Share of SME Lending of Total Loans in Select MENA Countries Low share of SME lending in GCC reflects the historical structure of oil-based economies, dominated by very large enterprises High-income Countries Middle-income Countries Source: Union of Arab Bank, World Bank, 2011 5

Recommendations for SME Growth In order for SMEs to contribute meaningfully to GDP growth and play a critical role in job creation in the coming years, they must be provided with the right tools and resources Required Facilitative Measures Public Sector Financial Intuitions SMEs Developing a supporting legal and regulatory framework Strengthening the financial infrastructure Effective government support mechanisms Building reliable data sources for SME finance Business development assistance Banks establishment of separate SME specific frameworks and divisions Establishment of specialized institutions and funds Financing support and credit lines for banks and NBFIs Vendor financing programs and factoring companies Improve corporate governance, reporting and transparency Engage qualified professionals in accounting and finance Improve financial discipline Establish organizational structure, reporting lines and decision making framework Employ modern technologies and disciplined standard operating procedures 6

ICDs Role in Supporting SMEs SMEs are the most critical focus across ICD s various intervention programs Select examples include: Financial Sector Intervention Program: Specifically targeted to provide strategic and financial support to banks and NBFIs in member countries for creation and expansion of SME financing programs: Active encouragement and strategic and management support to more than 40 financial institutions in more than 30 member countries. Extended lines of finance in the amounts aggregating to more than US$1.2 billion specifically for onward lending to the SME sector Also actively sponsors and invest in banks and leasing companies specifically targeting the SME sectors in various member countries SME Funds Program: ICD actively develops and sponsors country and region specific funds targeting SME support, investment and financing. To date, ICD has established two operating funds, with several others in pipeline: Afaq SME Fund: To support SME development and growth in Saudi Arabia. Target size is US$266 million out of which US$106 million already been raised. Fund is operational and has already deployed US$20 million to SMEs in food, education, industrial and logistics sectors Theemar SME Fund: Targeted to promote SMEs in Tunisia. Current fund size is US$12 million with a sizable sponsorship commitment from ICD. Already deployed approx. US$5 million to SMEs in various sectors including agriculture, food, industrial, financial services, manufacturing, etc. SME Funds in Pipeline: SME funds in various stages of development and launch cover: Turkey, Bahrain, Saudi technology sector, Algeria, Kyrgyzstan, Kazakhstan and Brunei Darussalam Additional Funds: ICD continues to expands its SME Funds program, and a number of additional funds targeting other member countries are in planning stages. 7