1. Ecosystem Supporting SMEs and SME Banking
Qamar Saleem
Senior SME Banking Specialist
IFC Bank Advisory services, EMENA
November 24th, 2014

2. Key Messages
Sizeable SME population in MENA region (19-23 million) largely lacking access to credit ($ billion financing gap)
SME finance from the banking sector is low in MENA (8%); Jordan was estimated at 10%. Multiple access to finance challenges inhibit growth
Banks as well as SMEs face various obstacles which inhibit easy access to finance for this underserved segment
IFC as part of G20 SME Finance sub-group recently reviewed global SME finance practices & reviewed 164 models
Significance of legal & regulatory framework, financial infrastructure, public sector interventions & capacity building for banks emphasized
IFC as a knowledge leader in SME finance has a range of services and knowledge collateral available to support SME development

3. There are million Micro Small & Medium Enterprises in the MENA facing a financing gap of $ billion
Number of MSMEs in MENA by size
Millions
Formal SME’s (>5 employees) by country
‘000
Medium
( employees)
Egypt
Morocco
Small
(10-49 employees)
Formal SMEs 10%
Algeria
Iraq
Very small
(5-9 employees)
Sudan
Micro
(1-4 employees)
Saudi Arabia
Yemen
60-70
Informal
UAE
80-90
Qatar
10-12
Total
19-23
Kuwait
28-35
Jordan
16-20
SOURCE: IFC-McKinsey database 2011, Country statistical offices
SOURCE: McKinsey-IFC MSME Database 2011

4. Unemployment amongst Youth and limited financial inclusion of Women remain key areas of concern in the region
Youth unemployment
Women in Business
SOURCE: IFC, Education for Employment Report, 2011
SOURCE: IFC. Strengthening Access to Finance for Women-Owned
SMEs in Developing Countries

5. While SME finance has 10% share in Jordan, it is heavily medium enterprise focused; ~$2 billion finance gap needs to be addressed
75%
Korea
SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

6. However, there are multiple obstacles faced by financial institutions – information asymmetry, collateral, & enabling environment are key issues
% of banks responding that obstacle is very important or important for SME Financing
SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

7. There are various barriers for SMEs as well to obtain funding – collateral, pricing, advisory requirements being the key areas
SOURCE: SMEs in MENA: Leveraging Growth Finance for Sustainable Development (Citi Foundation and Shell Foundation)

8. IFC completed a review of leading SME finance practices and models as part of our work with the G20
G20 SME finance Sub Group identified successful practices & policy measures for SMEs in 2011
Work involved review of 164 different models globally and subsequent policy requirements
Key Recommendations from the G20 Sub-Group
Developing specific country strategies
Developing supporting legal & Regulatory framework
Building reliable data sources for SME finance
Strengthening the financial infrastructure
Effective government support mechanisms
Address specific market failures e.g. women and sustainable energy finance
Building the capacity of financial institutions 1 2 3 4
SME Finance Policy Guide – issued October 2011 by IFC 5

9. 1
Country level strategies and supportive legal & regulatory environment are needed to enhance access to finance for SMEs
Ensure effective collection & monitoring of data for efficiency of measures
Strengthen credit reporting to even the playing field between small and big banks
Avoid over restrictive licensing requirements to significantly increase competition levels
Support non-FI alternatives to bank lending in the market e.g. leasing and factoring
Case Study:
SME Corporation,
Malaysia
Single dedicated agency to formulate and coordinate overall policies & strategies for SMEs
Malaysia Incorporated (established 1983) and PEMUDAH task force (launched 2007) for public-private sector collaboration
Bling (business linkages) program to facilitate SMEs supplying to large companies
Launch of SCORE (A diagnostic tool to rate and enhance competitiveness of SMEs) in 2007
INNOCERT (Innovation Certification for Enterprise Rating and Transformation Programme) program

10. 2
Accounting and audit requirements need a balance between transparency & regulatory simplicity
Credit bureau & registries need complimentary systems for personal and business information from all players (i.e. FI and Non-FI)
SME rating agencies offer a potential alternative, but need a certain critical market size (e.g. India)
Financial infrastructure needs to be strengthened for improved transparency of SMEs
Case Study:
SME Rating Agency of India
India’s 1st rating agency for MSME’s
Diversified equity ownership by 11 banks allowed lenders to accept rating and extend financial and non-financial benefits
SMEs are bucketed by size for peer comparisons
Rating fee < $1155, subsidized by the government by 75%
SMERA forecast to reach out to over 80,000 SMEs over the next 5 years

11. 2
….and financial infrastructure can be strengthened for venture capital and private equity access to the SME market
Secured transaction regimes should allow for a wide range of enforceable collateral & out of court enforcement options
Improve corporate governance practices should allow venture Capital/ private Equity access to SMEs
SME stock Exchanges have only proven marginally useful due to low volumes and a lack of investor interest
Case Study: INOVAR Program, Brazil
Objective: to strengthen investment in new technology SMEs and to establish Venture capital
Created a research and information dissemination platform and developed mgt capacity to accelerate VC investment
Established a VC portal where investors and entrepreneurs register
Allows for the provision of business plans and joint due diligence for VC funds
20 venture forums established and over $1 billion in VC/ PE investment made in SMEs

12. 3
Effective public sector interventions needed to widen opportunities, build SME capacities and avoid market distortions
Credit guarantees can be highly effective, but subsidies should be minimized to clear market failure areas
Government procurement can link SMEs into supply chain finance, providing they are paid on time
MSME capacity measures e.g. training should ideally be on a commercial/near-commercial basis and become scalable
Case Study:
FOGAPE, Chile
Outreach– 30,000 guarantees issued (1,800 per million people)
Finance – Targeted to small businesses, low ceilings
Distribution – Through its partner lending institutions
Coverage – 70-80%, higher for investment loans
Approach – Portfolio/program Lending
Fees- risk-based (1-2%)
Delinquency - Net loss rate = 1.5%

13. ….currently credit guarantee schemes outreach in MENA is low – benchmark country averages (2,080/million people; 1.2% of GDP) 3
Operation Mechanism
Individual
N/A
Hybrid
SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region

14. ….benchmark countries schemes exhibit higher scale and proficiency3
….benchmark countries schemes exhibit higher scale and proficiency
Operation Mechanism
Portfolio
Auction
Hybrid
SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region

15. Specific market failures like financial services to Women-in-business & Sustainable energy finance (SEF) need to be addressed 4
Economic impetus - 31 to 38% of SMEs in developing countries are owned by women – MENA average is 12-15%
Women owned SMEs is a profitable opportunity but requires a tailored methodology
Key approaches adopted for SEF are a) legal and policy reforms, b) lending facilities targeting banks and/or directly SMEs; c) technical assistance to raise awareness
Case Study: Women Entrepreneur
Package, Garanti Bank, Turkey
Objective to meet businesswomen’s network, training and financial needs
Provision of customized suite of services and a support loan and financial training
Reached out to 8,400 women and $156 m USD lending disbursed
Case Study:
Erste, Czech Republic
FINESA (Financing Energy Saving Applications) developed. IFC supported bank, identified SEF potential in Czech market- identified SEF potential in Czech market (10M people), $7.3 billion over 6 years
CS became leading bank in Czech sustainable energy market, with a $650M (Euro 500M) portfolio, new deposit accounts valued at $10 million
In Collaboration with IFC

16. Banks can play a leading role but capacity of financial institutions needs to be enhanced to effectively manage SME business 5
Key areas where core competencies are required for successful SME banking
SOURCE: IFC Analysis

17. 5
….SME Banking can be the most profitable business segment in the Bank but performance varies considerably between winners and losers
SME Banking profitability comparison
Winners vs. Losers in SME Banking
SOURCE: IFC, SME Banking Knowledge Guide
SOURCE: Mckinsey Research

18. IFC provides a combination of Investment and Advisory Services for optimal results
Build capacity of FIs in strategy, market segmentation, credit risk management, product development through new approaches and systems to scale up their financing for SMEs on a sustainable basis
Promote sub-sector focus: women-owned SMEs, sustainable energy SME projects, agri SMEs, leasing, etc
Raise awareness on best practices in the SME Finance space
ADVISORY
Capacity Building for FIs
Develop credit reporting infrastructure based on country needs
Support development of secured transactions, collateral registries, legal and regulatory framework
Build capacity of public/private stakeholders through advice and training
Financial Infrastructure
Equity Investments in Financial Institutions / Equity Funds for SMEs
Funded lines to expand investment and working capital lines especially in illiquid markets
Blended finance options to support the expansion of IFC’s risk appetite (e.g. grace periods, performance based pricing, subordination, higher risk /lower security or in limited cases, local currency positions) [for selected projects]
Focus underserved segments, e.g., gender, fragile/conflict, agri, climate
SME Financing & Investments
INVESTMENT
Risk Sharing Facilities / Partial Credit Guarantees to:
Enhance risk taking capacity and provide capital relief via low risk weightings
Avoid FX mismatches and encourage domestic resources for SME financing
Risk Mitigation & Enhancements

19. International Finance Corporation
Bank Advisory Services, EMENA
24th Floor, Nile City Tower (North)
2005C Corniche El Nil
Ramlet Boulac
Cairo – Egypt