Nicolas Blancher, adviser at the IMF Middle East and Central Asia department explains in an interview with Daily News Egypt, how small and medium-sized enterprises’ financial inclusion is at the core of economic diversification, growth, and job creation in the MENA.
The Middle Eastern countries including Egypt, have taken several measures to realise the inclusion of small and medium-sized enterprises (SMEs) into the formal sector, in order to boost economic growth.
How do you evaluate these measures, and what do these countries need to do more to attain this objective, noting that the current percentage of inclusion is very low?
A key conclusion from our work is that there is no magic bullet to increase SME financial inclusion in a meaningful, safe, and sustainable manner. Partial policy approaches that have sometimes been pursued, such as those solely based on public credit guarantees, have not sufficed to achieve this goal. In contrast, we highlight that holistic reform strategies are required. Such strategies encompass broad priorities in terms of macroeconomic stability and institutional quality, as well as improvements to the business environment and specific regulatory and legal reforms that will support SME lending, such as with regard to the availability of credit information or contract enforcement. A growing number of countries have been designing and implementing such holistic reform strategies. Their implementation will take some time, but this is a very encouraging development in which the IMF, together with several other regional and international organisations, will increasingly play a supportive role.
Egypt is among the countries that have made great strides in achieving the financial inclusion of SMEs. The Egyptian authorities have recently been formulating a comprehensive approach and vision for the integration of SMEs into the formal sector and thus achieving financial capital. IMF representatives are working on this file with the Egyptian authorities and providing them with the necessary technical support to formulate the necessary strategy to achieve this. Daily News Egypt interviewed then to investigate further into this matter the transcript for which is below, lightly edited for clarity:
What are the main challenges facing SMEs regionally generally, and Egypt particularly?
As regards the overall development of SMEs in the region, our November 2018 REO publication had a specific chapter addressing this issue. Its main conclusions are that increasing access to finance, investing in education and infrastructure, reducing the role of the state in the economy, and improving government effectiveness and governance would unlock private investment, laying the foundation for higher and more inclusive growth in the region.
Can you give us a recipe of inclusion success in the MENA region, mentioning some success stories?
There is no recipe in the sense that again, there is no magic bullet or one-size-fits-all approach to achieve meaningful improvements to SME financial inclusion. Instead, we emphasise the fact that each country needs to define its own specific strategy. This may encompass a variety of reforms, as already mentioned. They key is to identify and prioritise those reform areas that, in each country, are the main obstacles to SME financing.
This being said, key issues that seem to explain most of the ‘SME financial inclusion gap’ in the Arab region as a whole are: economic development in general (which captures quality of infrastructure and education); governance and control of corruption; credit information availability; economic competition; and the quality of the business environment. The SMEs represent 95% of the total of the enterprise in MENA and half of the employment
Several countries in the region have implemented or initiated comprehensive financial inclusion strategies that should allow for considerable progress if they are fully implemented. For instance, this is the case in Jordan, Lebanon, Morocco, or Saudi Arabia.
How can SMEs inclusion into the formal economy, boost economic growth?
The inclusion of SMEs into the formal economy gives them potential access to larger amounts of financing through the banking system or through alternative sources of finance, such as capital markets. Our work shows that increased financial access can be a source of substantial benefits for economies in the region, both in terms of growth and job creation.
In addition, the holistic reform strategies that we recommend to achieve greater SME financial access could also bring about broader economic benefits, as they could trigger a virtuous circle of greater transparency and reduced informality of SMEs.
How can we improve SMEs access to finance in the Middle East?
As noted, key priorities in the region are economic development in general, governance, and control of corruption, credit information availability, economic competition, and the quality of the business environment.
Let me also highlight here the potential importance of alternative or new channels of SME finance. Experience in other regions shows that capital markets and, increasingly, fintech, can play a role in facilitating SME access to financing. In these areas, again, the region has a lot of progress to make to develop the ecosystems needed to scale up these channels.