1. Tel: +961 1 780200 Fax: +961 1 780206 P.O. Box 113-6194 Hamra, Beirut 1103 2100 Lebanon Contact: Ms. Eva Dirany eva.dirany@iktissad.com eva.dirany@iktissad.com Mr. Najib Choucair Director of the Banking Department Banque Du Liban Lebanon Economic Forum Session II – Outlook of SMEs in the Lebanese Economy and Existing Challenges

2. 2 MSME’s in Lebanon By Mr. Najib Choucair Banque Du Liban www.bdl.gov.lb

3. 3 Small and Medium Portfolio The Small and Medium Entities Portfolio comprises: a- Loans granted to liberal professions such as doctors, engineers and lawyers in order to finance their professional activities. b- Loans granted to sole proprietorships or to corporations (general partnerships, limited partnerships, jointly-owned companies, jointstock companies including holdings, partnerships limited by shares, limited liability companies or offshore companies) whose annual turnover does not exceed the equivalent of USD 5 million.

4. “SME” stands for small and medium-sized enterprises as defined in EU law. The main factors determining whether a company is an SME are: 1. number of employees 2.either turnover or balance sheet total “SME” stands for small and medium-sized enterprises as defined in EU law. The main factors determining whether a company is an SME are: 1. number of employees 2.either turnover or balance sheet total 4 company categoryEmployeesTurnover Balance Sheet total Medium-sized<250≤ € 50m≤ € 43m Small<50≤ € 10m Micro<10≤ € 2m

5. 5 The size of the opportunity According to IMF Financial Access Survey global emerging banking revenues are $150 billion today and are expected to more than double over the next 5 years to approximately $367 billion by 2015(20% per annum growth). It is worth noting that the MENA region constitute nowadays only 4% of this Emerging Market. According to IMF Financial Access Survey global emerging banking revenues are $150 billion today and are expected to more than double over the next 5 years to approximately $367 billion by 2015(20% per annum growth). It is worth noting that the MENA region constitute nowadays only 4% of this Emerging Market. You should note that the size of MENA economy to all emerging markets is more than 4%, then one can conclude MENA banks need to expand their Intermediation Role to increase their revenues.

6. 6 The size of the opportunity MSME bank revenues in Billion $ Regions20102015% East Asia6216720 South Asia206421 Latin America275918 Sub-Saharan Africa51219 MENA61518 Eastern Europe304914 Grand Total15036620

7. SME Loan/Total Loans(%) in MENA Countries

8. 8 How banks can grasp such an opportunity? It is radically important to develop a rough understanding of their markets. The geographic concentrations of the MSME clients and the potential banking revenue pool in which the MSME operate. It is radically important to develop a rough understanding of their markets. The geographic concentrations of the MSME clients and the potential banking revenue pool in which the MSME operate. Banks have to find an efficient way to lower their operating cost specially for small entreprises. They must develop new and creative ways to assess credit (i.e. loan origination, monitoring, and collections) Banks have to find an efficient way to lower their operating cost specially for small entreprises. They must develop new and creative ways to assess credit (i.e. loan origination, monitoring, and collections) Banks must empower MSME clients by organizing seminars for existing MSMEs or providing start-up packages for new ones. Banks must empower MSME clients by organizing seminars for existing MSMEs or providing start-up packages for new ones. Banks must engage with governments, they can establish risk- sharing facilities and credit bureaus to seek out information that identifies under-served and unserved clients. Banks must engage with governments, they can establish risk- sharing facilities and credit bureaus to seek out information that identifies under-served and unserved clients.

9. Credit Distribution and Risk Small debtors (who benefit from loans less than 15thousand $) constitute the largest percentage of debtors(65% of debtors). However most credit(50%) go to only 1% of total debtors. Small debtors share of NPL is only 5%, most of the risk is carried by large debtors, where their NPL is 55% of total NPL.

10. 10 Distribution of Credit to the Private Sector by Amount

11. 11 Distribution of NPL by Amount

12. 12 Promising future for Lebanon SMEs Lebanon offers an attractive environment for growth driven mostly by very high skilled labor force, affordable costs, excellent universities, language support and strong entrepreneurship culture. This is why access to credit by the private sector and especially small and medium enterprises is vital and is the engine for economic growth, whilst limited and difficult access to the finance required is a main obstacle to private sector development in the Republic; insufficiency of collateral is one of the main reasons for the difficulty to obtain credit or the increase of its cost, in the best of situations. Lebanon offers an attractive environment for growth driven mostly by very high skilled labor force, affordable costs, excellent universities, language support and strong entrepreneurship culture. This is why access to credit by the private sector and especially small and medium enterprises is vital and is the engine for economic growth, whilst limited and difficult access to the finance required is a main obstacle to private sector development in the Republic; insufficiency of collateral is one of the main reasons for the difficulty to obtain credit or the increase of its cost, in the best of situations.

13. Loans /Total Loan Ratio by Guarantee

14. Promising Future for Lebanons SMEs Central Bank of Lebanon is in the process of promoting a law on secured lending to encourage lending to small and medium enterprises, since these enterprises do not possess sufficient immovable collateral to allow them access to finance and are unable to utilize their current assets as collateral for its loans due to the abstention of banks and other financial institution from taking these assets as collateral as a result of the lack of centralization of registration of such assets and the difficulty to foreclose thereon in an expeditious manner to collect the financed amounts. 14

15. 15 Promising future for Lebanon SMEs The purpose behind this law, as previously indicated is to encourage lending against movable collateral through setting a legal mechanism which allows creditors to provide credit required for financing commercial, industrial, and agricultural businesses against movable collateral along the lines of immovable collateral as these collateral shall allow growth in the private sector, putting capital at work, creating sufficient jobs for many workers, and shall decrease the risk of lending by financiers hence increasing credit granting at favorable interest rates

16. Doing Business Indicator The Doing Business Report issued by the International Finance Corporation in the year 2013 ranked Lebanon as 115 out of 183 economies in the ease of doing business. The Doing Business Report issued by the International Finance Corporation in the year 2013 ranked Lebanon as 115 out of 183 economies in the ease of doing business. As for the Getting Credit indicator, Lebanon was ranked 3 out of 10 points in the Legal Protection indicator, which measures the legal support provided for the rights of the borrowers and lenders. As for the Getting Credit indicator, Lebanon was ranked 3 out of 10 points in the Legal Protection indicator, which measures the legal support provided for the rights of the borrowers and lenders. Experts of the International Finance Corporation have indicated that implementing this reform, as planned, will serve to increase Lebanon's ranking in this indicator. Experts of the International Finance Corporation have indicated that implementing this reform, as planned, will serve to increase Lebanon's ranking in this indicator. 16

17. The Deduction in Legal Reserve Requirement The legal Reserve Requirement is reduced for any bank if it gives the following loan types in LBP: Productive Sectors (Industrial, Tourism, Agriculture, And IT). Productive Sectors (Industrial, Tourism, Agriculture, And IT). Housing Housing Education Education Environment Environment Microcredit Microcredit 17

18. 18 Our Credit Registry Our credit bureau is an information pool for historical and current credit obligations on individuals, SMEs, and corporations. Our credit bureau is an information pool for historical and current credit obligations on individuals, SMEs, and corporations. It improves the availability of credit in the economy and leads to a more efficient allocation of credit It improves the availability of credit in the economy and leads to a more efficient allocation of credit Our Credit registry is designed to mitigate the risks associated with lending, strengthen the bank supervision, and improve the quality of credit analysis by financial institutions. Our Credit registry is designed to mitigate the risks associated with lending, strengthen the bank supervision, and improve the quality of credit analysis by financial institutions. Across the globe, pioneering microfinance institutions and banks are using a range of technologies, including credit scoring, to reduce costs and reach new customers. Adoption of appropriate technology, when combined with quality credit information, can allow lenders to manage risks, increase lending volume, & improve operating efficiency and profit. Across the globe, pioneering microfinance institutions and banks are using a range of technologies, including credit scoring, to reduce costs and reach new customers. Adoption of appropriate technology, when combined with quality credit information, can allow lenders to manage risks, increase lending volume, & improve operating efficiency and profit.

19. Lending To Private Sector

20. Clients Declared at The Credit Registry

21. NPL/Total Loans

22. Query Requests at The CDR

23. 23 Concluding Remarks Even though SMEs constitute over 90% of the country’s enterprises but have so far been unable to reach their full business potential due to limited resources but central bank efforts in promoting the key features of a modern secured transactions legal framework that support access to credit based on movable collateral investments in SMEs are expected to flourish. Even though SMEs constitute over 90% of the country’s enterprises but have so far been unable to reach their full business potential due to limited resources but central bank efforts in promoting the key features of a modern secured transactions legal framework that support access to credit based on movable collateral investments in SMEs are expected to flourish.

24. 24 Thank You Thank You