I would like to welcome you all to this important session on the development and financial inclusion of small- and medium-sized enterprises (SMEs) in the Arab region. I am very grateful to Minister Al Tayer and the U.A.E. authorities for co-hosting this event with us and for their hospitality.
Around this time last year, during the 2018 Marrakesh Conference, policymakers across the region made it clear that making growth more inclusive is a top priority. Arab countries have made progress, but there is still much to be done to increase growth and job opportunities for all. Increasing financial access came up as a key aspect of SME development and the inclusive growth agenda.
Over the past year, we have looked closely into international experience and policies to increase SME financial inclusion. We are now proposing to operationalize this agenda to better serve our members.
I will say a few words about: (i) “why” focus on SME financial inclusion; (ii) “how” countries can create an enabling environment for SMEs to flourish; and (iii) another “how” – how the Fund can support its member countries on these critical efforts.
1. Why Focus on SME Financial Inclusion
Turning to my first point: financial inclusion for SMEs is macro-relevant. Why? Because SMEs help create jobs, diversify economies, and support growth.
In the Arab region, SMEs represent 96 percent of registered companies. They also employ half of the labor force. Yet their access to finance is the lowest in the world: lending to SMEs in the region is only 7 percent of total bank lending.
We found that closing this financial inclusion gap – with respect to the average of emerging and developing countries – would yield multiple economic benefits:
– It could boost annual economic growth by up to one percent, potentially leading to about 15 million new jobs by 2025 in the Arab region.
– It could also increase the effectiveness of fiscal and monetary policies, by improving domestic revenue mobilization and monetary policy transmission.
It is clear then, that supporting and enabling SMEs is a key component of any inclusive growth agenda. So how can countries go about creating the necessary environment for SME development and financial inclusion?
2. How to Create an Enabling Environment for SMEs
Based on our recent research, we found that promoting SME financial inclusion requires a holistic approach. To achieve meaningful, safe and sustainable SME access to finance, there is no magic bullet. And partial approaches are unlikely to suffice.
A range of economic and institutional factors are needed to help scale up SME bank credit. Three common determinants stand out.
- First, sound economic fundamentals and financial sectors . This means curbing the size of the state where it crowds out financing for SMEs and creates an uneven playing field with SOEs. It also means a sound and competitive economy and banking sector that facilitate market entry for SMEs.
- Second, institutional factors are also essential . This includes good governance and financial supervisory capacity, availability of credit information, and strong legal frameworks. For example, our research shows that increasing the coverage of credit bureaus in the Arab region could raise employment, especially by SMEs.
- Third, harnessing the potential of alternative channels of SME finance . For example, by tapping capital markets and supporting the development of SME capital market segments. Fintech is also a potential game changer for SMEs: it can increase competition among credit providers and expand credit information.
3. How the Fund is Supporting Member Countries on SME Financial Inclusion
The IMF can better support Arab countries in this area. Like in other regions, several Arab countries, such as Egypt, Jordan, and the U.A.E., have started to implement comprehensive strategies to increase financial inclusion, including for SMEs.
Based on our recent work, we plan to provide advice that is more granular and tailored to each specific country needs and reflects international experience. We will also coordinate our support with other regional and international organizations.
Our new paper on SME financial inclusion will be launched on Tuesday in Cairo. We hope that this will mark the start of a deeper engagement with our members in this important policy area.