## fisfmecaea

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### Executive Summary — Introduction and Scope
- SME financial inclusion is central to economic diversification, growth, and job creation challenges in the Middle East and Central Asia (MENAP and CCA) regions.
- Paper organization: present the SME financial inclusion gap; identify drivers of SME access to financing; review alternative channels (capital markets and fintech); suggest holistic policy approaches tailored to MENAP and CCA countries.
- Regional definition: 31 countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and in the Caucasus and Central Asia (CCA).
- Definition: Financial inclusion = access to, and use of, formal financial services.

### The SME Financial Inclusion Gap — Key Facts
- SMEs represent about 96 percent of all registered companies in the MENAP and CCA regions and employ about half of the total labor force.
- Average share of SMEs in total bank lending in MENAP and CCA countries: about 7 percent; as low as 2 percent in certain Gulf Cooperation Council countries.
- World Bank Enterprise Survey results:
  - About 32 percent of firms in the MENAP region report access to credit as a major constraint (world average: 26 percent).
  - About 18 percent of firms in the CCA region report access to credit as a major constraint.
- Composite SME Financial Inclusion Index (PCA on World Bank Enterprise Survey firm-level data):
  - MENAP countries lag the rest of the world.
  - CCA performs slightly better than MENAP but lags Europe, Asia, and Latin America.
- SME access to financing is low relative to peers at similar development levels; deviations from predicted inclusion suggest scope for improvement even within current macroeconomic environments.
- Credit concentration has been rising; SME share in lending has been decreasing globally and in MENAP and CCA.

### Benefits from Increasing SME Financial Inclusion — Macro and Micro Evidence
- Overall: Closing the SME financial inclusion gap could yield substantial macro-financial benefits in MENAP and CCA: higher growth, job creation, improved policy effectiveness, and enhanced financial stability.

- Economic growth
  - Closing the SME financial inclusion gap vis-à-vis emerging market and developing economies could increase annual economic growth by an average of 0.3 percentage point.
  - DSGE model calibrations: relaxing key constraints to SME access to financing could yield long-term cumulative growth benefits of about 5 percent in certain MENAP and CCA countries.
  - Firm-level estimates + growth accounting indicate potentially higher GDP growth gains of about 1 percentage point.

- Job creation
  - SMEs account for nearly half of the workforce in the average country and are major contributors to employment growth.
  - Firm-level impacts of formal financing access:
    - Increase of 1 percentage point in annual employment growth (SME-specific: 1.3 percentage points; large firms: 0.8 percentage point).
    - Increase of 2.4 percentage points in labor productivity growth (SME-specific: 2.3 percentage points; large firms: 1.8 percentage points).
  - Within SMEs:
    - Employment gains largest for small firms: 1.7 percentage points.
    - Productivity gains largest for medium firms: 2.5 percentage points.
  - Macro-level estimates: a 1 percent rise in SME credit leads to:
    - Decrease in unemployment of about 0.1 percent for a sample of emerging market and developing economies.
    - Decrease in unemployment of up to 0.2 percent for MENAP and CCA countries.
  - Regional employment projection: Greater SME financial inclusion could help create about 16 million new jobs by 2025 in MENAP and CCA (Annex: 16.6 additional jobs by 2025, of which 14.3 in MENAP and 2.3 in CCA countries; Annex also reports about 16.5 million new jobs by 2025 in related estimates).

- Macroeconomic policy effectiveness and financial stability
  - Greater SME financial inclusion can enhance fiscal policy effectiveness, including through better tax collection.
  - SME inclusion enhances monetary and fiscal policy transmission; impulse responses and VAR results show stronger fiscal and monetary transmission in high-inclusion countries (statistically significant at the 10 percent level in several tests).
  - Financial stability trade-offs:
    - SME credit can improve bank portfolio diversification if supported by strong risk management and supervision.
    - SME credit is relatively risky; rapid growth in SME credit may lead to unsound credit exposure without institutional safeguards.

### Drivers of SME Financial Inclusion — Empirical Determinants
- Cross-country correlates and drivers:
  - Economic fundamentals and financial sector characteristics:
    - Macro-economic stability and price stability (negative relationship between inflation and SME inclusion).
    - Limited relative public sector size to avoid crowding out SME credit.
    - Financial sector soundness (bank Z-scores, reliance on core funding) and low NPLs.
    - Competitive banking system and broader economic competition.
  - Institutional factors:
    - Strong governance (control of corruption, voice and accountability, political stability).
    - Financial regulatory and supervisory capacity.
    - Credit information availability (public credit registry/credit bureau coverage).
    - Supportive business environment: modern collateral and insolvency frameworks, effective contract enforcement, property rights.

- Quantitative associations (selected coefficients as reported)
  - Log of PPP GDP per capita: 0.0773*** (0.00951) in Annex Table 2.1.
  - Time required to enforce a contract (days): 20.000130*** (0.00004).
  - Small-firm share of total firms: 20.207** (0.09470).
  - Control of corruption: 0.0709*** (0.02450).
  - Public credit registry coverage (% of adults): 0.00429*** (0.00143).
  - Annex 7 coefficient highlights (selected): Infrastructure: 0.279; Diversification: 0.351; Informality: 0.222; NPLs: 0.153; Competition: 0.141; Inflation: 0.067; Public investment (%total): 0.093; Government effectiveness: 0.086; Bank deposit (%GDP): 0.086; Bank Z-score: 0.086.

### Public Sector, Crowding Out, and Fiscal Determinants
- Public investment effects:
  - In MENAP, a one percent increase in public investment may lead to a 0.7 percent decline in SME financial inclusion (against an EMDE average of 0.2 percent).
  - Public investment represents on average 34 percent of total investment in MENAP countries (against 24 percent in other EMDEs).
- Large government and SOE financing needs can crowd out private sector credit; MENAP shows higher credit to government and SOEs (percent of GDP) than other regions.

### Financial Sector Characteristics and Competition
- Bank soundness supports SME access; weak asset quality undermines it (examples: Azerbaijan and Kazakhstan with nonperforming loan ratios of about 20 percent).
- Lack of bank competition reduces SME access; MENAP (particularly Gulf Cooperation Council countries) lags in competition.
- High banking sector concentration associated with higher interest rate margins and profitability, which may discourage SME lending.

### Institutional Aspects: Credit Information, Governance, Insolvency
- Credit information:
  - Quality and coverage of credit registries/bureaus are key; raising credit bureau coverage to EMDE averages would raise employment by 1 percentage point for all firms and by 1.2 percentage points for SMEs (Figure 9, Annex).
  - Collateral registries for movable assets can increase likelihood of firm access to bank financing by 10 percentage points.
- Governance and business environment:
  - Corruption, political risks, weak property rights, costly insolvency regimes, and enforcement delays are negatively correlated with SME inclusion.
  - Example constraints: countries with average collateral requirements up to 250 percent of loan value (Armenia, Azerbaijan, Tunisia); Kyrgyz Republic with obstacles to credit monitoring and interest rate margins close to 20 percent.

### Alternative Financing Channels — Capital Markets and Fintech
- Capital markets
  - Can serve SME financing needs directly and indirectly by channelling funds to intermediaries.
  - Constraints: weak savings mobilization through formal financial system; limited size of institutional investors; bond issuance concentrated in governments and large corporates.
  - Ecosystem requirements: macro stability; large and diversified investor base; financial infrastructure; legal and regulatory frameworks; SME-specific issuance platforms; tax incentives; incubators/accelerators; proportionate regulation.

- Fintech
  - Can reduce bank credit frictions (credit information, competition) and open new SME financing channels (P2P, marketplace lending, invoice lending, merchant finance, crowdfunding).
  - International examples:
    - UK: P2P SME lending <1 percent of new SME loans in 2014; >3 percent by 2017.
    - Alibaba: securitized loan portfolio >RMB 200 billion for >800,000 SMEs; MYbank extended RMB 441.3 billion in SME loans by 2017.
  - MENAP and CCA state: fintech nascent but accelerating; UAE, Lebanon, Jordan, and Egypt host three-fourths of MENAP startups; Kazakhstan concentrated activity in CCA.
  - Fintech constraints: talent shortages, limited private capital, low financial literacy.
  - Risks: data privacy, cybersecurity, consumer protection, short-term funding reliance, untested resilience through full cycles.
  - Regulatory responses: range from applying existing standards to sector-specific frameworks; sandboxes and innovation hubs (examples: Singapore, UAE, UK); Global Financial Innovation Network (GFIN) membership includes Abu Dhabi Global Market, Central Bank of Bahrain, Dubai Financial Services Authority (as of August 2018, GFIN comprises 12 regulatory bodies).

### Policy Instruments — Current Uses and Limitations
- Common direct interventions:
  - State-owned SME banks: may improve access and act countercyclically but often suffer from low efficiency, concentration risk, politically directed lending, weak governance and asset quality.
  - Credit guarantee schemes: expanded since the global financial crisis; evidence of contribution to inclusion but potential drawbacks (weakened credit discipline, crowding out unsecured loans, questionable financial sustainability).
  - Interest rate caps: intended to protect consumers but can reduce credit supply to small/risky borrowers, raise fees, reduce transparency, shrink branch networks, and harm bank profitability (case evidence cited).
- Financial inclusion strategies:
  - Increasingly used; success factors include cross-agency coordination, private-sector consultation, central bank leadership, and regulatory reforms for information sharing, contract enforcement, and insolvency.
  - Country examples: Georgia (Georgia 2020), Pakistan (National Financial Inclusion Strategy 2016–20 with target SME share in private sector bank loans of 15 percent by 2020), Jordan (National Financial Inclusion Strategy 2018–20 and new credit bureau January 2016).

### Recommended Policy Stance — Holistic, Sequenced, and Country-Specific
- Holistic approach elements:
  - Macroeconomic stability and prudent fiscal stance.
  - Financial sector soundness and competition.
  - Legal, regulatory, and institutional reforms: credit information, collateral and insolvency frameworks, contract enforcement.
  - Targeted measures to develop capital markets and fintech ecosystems with proportionate regulation and consumer protection.
- Rationale:
  - Holistic reforms can trigger a virtuous circle: greater SME transparency, reduced informality, stronger demand for credit, and broader economic benefits.
  - Partial, narrow interventions (only direct public financing or guarantees) are unlikely to yield large or durable benefits.
- Implementation guidance:
  - Reforms are mutually reinforcing and can proceed in parallel based on country priorities and sequencing.
  - IMF and other international organizations can provide analytical input and concrete policy advice to design country-specific reform strategies.

### Annex Summaries — Empirical Methods and Quantitative Results
- SME Financial Inclusion Index construction:
  - Steps: normalization; aggregation of normalized variables into sub-indices by principal component analysis using the first component; aggregation into final index.
  - Contributing variables include: Percent of firms with a bank loan/line of credit; Percent with checking or savings account; Percent using banks to finance investments; Percent using banks for working capital; Proportion of investments financed by banks; Proportion of working capital financed by banks.
  - Index coverage: 119 countries (20 in MENAP and CCA).
  - Index correlates strongly with share of partially/fully credit-constrained SMEs and share of SMEs with rejected loans.

- Growth and unemployment econometrics (Annex 3)
  - Unemployment regressions (dependent variable: unemployment rate (log); Loans to SMEs (log)):
    - FE (1): 0.0169 (0.0222)
    - GLS (2): 20.0700*** (0.0140)
    - GLS (3): 20.045*** (0.014)
    - GMM (4): 20.136*** (0.0472)
    - GMM (5): 20.131*** (0.042)
  - Growth regressions (dependent variable: real GDP growth / Real GDP (log)):
    - Loans to SME growth:
      - FE (1): 0.00516 (0.005)
      - GLS (2): 0.01067*** (0.003)
      - GMM (3): 0.08298*** (0.023)
      - GMM (4): 0.05193*** (0.007)
    - SME financial inclusion index (log): 0.056** (0.023) and 0.060** (0.024) in reported specifications.
  - DSGE model used: Dabla-Norris and others (2015b); channels include financial access cost (ψ), collateral requirements (λ), and monitoring cost (χ).
    - Parameter ranges and stylized outputs reported; model qualitative finding: significant potential gains from reducing ψ and λ in selected countries (examples: Egypt, Pakistan, Uzbekistan, Armenia, Georgia).

- Firm-level evidence and macro translation
  - Firm-level employment and productivity specification (Ayyagari and others (2016) approach) yields positive and significant α estimates; SMEs show larger employment gains.
  - Growth accounting: additional 1.3 percent in SME employment growth plus labor productivity gain of 2.3 percent (labor share two-thirds) implies additional 1 percent of GDP growth.
  - Employment projection: about 16.5 million new jobs in MENAP and CCA by 2025 (14.3 million in MENAP; 2.3 million in CCA).

### Key Priorities and Actionable Reforms (policy checklist)
- Prioritize policies that raise income per capita via infrastructure, education, and health to address largest share of inclusion gap.
- Strengthen governance and control of corruption to improve enforcement of financial contracts.
- Expand credit information coverage and improve credit registry quality.
- Reform insolvency regimes to reduce costs and resolution times.
- Relax collateral constraints and develop collateral registries for movable assets.
- Foster banking competition and reduce market concentration and public ownership where appropriate.
- Develop capital market infrastructure and institutional investor base (debt, equity, specialized funds).
- Leverage fintech innovations with proportionate regulatory frameworks to expand lending channels while managing risks.
- Ensure public interventions (state banks, guarantees) are designed with sound governance, clear objectives, independent management, performance evaluation, and do not crowd out private credit.

### Representative Quantitative and Case Examples (selected exact figures)
- SMEs ≈ 96 percent of registered companies in MENAP and CCA.
- Average SME share in bank lending ≈ 7 percent; as low as 2 percent in some Gulf Cooperation Council countries.
- World Bank Enterprise Survey: 32 percent (MENAP) and 18 percent (CCA) firms cite access to credit as a major constraint.
- Closing inclusion gap vis-à-vis EMDEs could raise annual growth by 0.3 percentage point; DSGE suggests cumulative long-term gains of about 5 percent in some countries; growth accounting indicates about 1 percentage point GDP gain possible.
- Employment potential: about 16 million new jobs by 2025 in MENAP and CCA (Annex reports 16.6; breakdown: 14.3 MENAP, 2.3 CCA).
- Credit bureau/registry and collateral effects:
  - Credit bureau coverage improvement to EMDE average → employment +1 percentage point for all firms and +1.2 percentage points for SMEs (Figure 9, Annex).
  - Collateral registry introduction → increases likelihood of firm access to bank financing by 10 percentage points.
- Alibaba securitized portfolio: >RMB 200 billion for >800,000 SMEs; MYbank SME loans by 2017: RMB 441.3 billion.
- UK P2P SME lending share: <1 percent of new SME loans in 2014; >3 percent by 2017.
- Case country NPL example: Azerbaijan and Kazakhstan nonperforming loan ratios ≈ 20 percent.
- Kyrgyz Republic example: interest rate margins close to 20 percent; high collateral requirements examples include Armenia, Azerbaijan, Tunisia with average collateral requirements as high as 250 percent of loan value.
- Annex Table 2.1 regression details reproduced exactly (see above for coefficients and standard errors).

*Financial Inclusion of Small and Medium-Sized Enterprises in MENAP and CCA — IMF staff compilation from the provided PDF content unit.*

### Executive Summary ������������������������������������������������������������������������������������������������������

### Executive Summary

### Introduction
- SME financial inclusion is central to economic diversification, growth, and job creation challenges in the Middle East and Central Asia (MENAP and CCA) regions.
- The paper focuses on macroeconomic and policy aspects of SME financial inclusion and is organized to: present the SME financial inclusion gap; identify drivers of SME access to financing; review alternative channels (capital markets and fintech); and suggest holistic policy approaches tailored to MENAP and CCA countries.
- The Middle East and Central Asia region refers to 31 countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and in the Caucasus and Central Asia (CCA).
- Financial inclusion is defined as the access to, and use of, formal financial services.

### The SME Financial Inclusion Gap
- SMEs represent about 96 percent of all registered companies in the MENAP and CCA regions and employ about half of the total labor force.
- The average share of SMEs in total bank lending in MENAP and CCA countries is about 7 percent, and as low as 2 percent in certain Gulf Cooperation Council countries.
- According to the World Bank Enterprise Survey:
  - About 32 percent of firms in the MENAP region report access to credit as a major constraint (world average: 26 percent).
  - About 18 percent of firms in the CCA region report access to credit as a major constraint.
- A composite SME Financial Inclusion Index (constructed using principal component analysis on World Bank Enterprise Survey firm-level data) shows:
  - MENAP countries lag the rest of the world in SME financial inclusion.
  - CCA performs slightly better than MENAP but still lags Europe, Asia, and Latin America.
- SME access to financing in the Middle East and Central Asia is low relative to peers at similar levels of economic development; deviations from predicted inclusion based on fundamentals indicate scope for improvement even within current macroeconomic environments.
- Credit concentration has been rising, with the share of SMEs decreasing both globally and in MENAP and CCA.

### Benefits from Increasing SME Financial Inclusion
- Overall finding: Closing the SME financial inclusion gap could yield substantial macro-financial benefits in MENAP and CCA, including higher growth, job creation, improved policy effectiveness, and enhanced financial stability.

- Economic growth
  - Closing the SME financial inclusion gap vis-à-vis emerging market and developing economies could increase annual economic growth by an average of 0.3 percentage point.
  - Country-specific DSGE model calibrations suggest relaxing key constraints to SME access to financing could yield long-term cumulative growth benefits of about 5 percent in certain MENAP and CCA countries.
  - Complementary firm-level estimates combined with growth accounting indicate potentially higher GDP growth gains of about 1 percentage point.

- Job creation
  - SMEs account for nearly half of the workforce in the average country and are major contributors to employment growth.
  - Firm-level analyses indicate that giving firms access to formal financing leads to:
    - An increase of 1 percentage point in annual employment growth (SME-specific: 1.3 percentage points; large firms: 0.8 percentage point).
    - An increase of 2.4 percentage points in labor productivity growth (SME-specific: 2.3 percentage points; large firms: 1.8 percentage points).
  - Within SMEs:
    - Employment gains are largest for small firms: 1.7 percentage points.
    - Productivity gains are largest for medium firms: 2.5 percentage points.
  - Macro-level analyses suggest a 1 percent rise in SME credit leads to:
    - A decrease in unemployment of about 0.1 percent for a sample of emerging market and developing economies.
    - A decrease in unemployment of up to 0.2 percent for MENAP and CCA countries.
  - Potential regional employment impact: Greater SME financial inclusion could help raise the employment rate, potentially creating about 16 million new jobs by 2025 in MENAP and CCA.

- Macroeconomic policy effectiveness and macro-financial stability
  - Greater SME financial inclusion can enhance the effectiveness of fiscal policy, including through better tax collection.
  - SME financial inclusion could increase the effectiveness of monetary and fiscal policies and contribute to macro-financial stability (frameworks and empirical analysis highlighted in the paper).

### Drivers and Policy Implications
- Cross-country experience identifies factors that help scale up SME bank credit:
  - Economic fundamentals and financial sector characteristics:
    - Macro-economic stability.
    - Limited public sector size to avoid crowding out SME access to credit.
    - Financial sector soundness.
    - A competitive banking system.
    - A competitive and open economy to boost SME investment and demand for credit.
  - Institutional factors:
    - Strong governance and financial regulatory and supervisory capacity.
    - Credit information availability.
    - A supportive business environment, including modern collateral and insolvency frameworks, and legal systems that allow adequate enforcement of property rights and contracts.

- Alternative financing channels can support SME access to financing and the supply of bank credit:
  - Capital markets can play a role across stages of SME development.
  - Fintech can reduce constraints on bank credit (for example, credit information or competition) and open new SME financing channels.
  - Both capital markets and fintech remain nascent in the MENAP and CCA regions.

- Existing policy instruments and their limitations:
  - Countries have used state-owned SME banks, credit guarantee schemes, and interest rate regulations, and many have developed national strategies for financial inclusion.
  - Partial approaches focused solely on direct public financing or guarantees are unlikely to yield large benefits.

- Recommended policy stance:
  - Meaningful, safe, and sustainable SME access to financing requires a holistic approach covering:
    - Macroeconomic stability and fiscal stance.
    - Financial sector soundness and competition.
    - Legal, regulatory, and institutional reforms (credit information, collateral and insolvency frameworks, contract enforcement).
    - Targeted measures to develop capital markets and fintech ecosystems.
  - A holistic approach can trigger a virtuous circle of greater SME transparency and reduced informality, generating broader economic benefits and stronger demand for credit.
  - Specific policy and regulatory frameworks are needed to encourage SME financing through capital markets and new technologies.
  - The IMF and other international organizations can provide analytical input and concrete policy advice to help formulate and implement country-specific reform strategies based on this framework.

*Financial Inclusion of Small and Medium-Sized Enterprises in MENAP and CCA — Executive Summary*

### Annex 5 provides details on the estimates.

### fisfmecaea - Annex 5 provides details on the estimates.

### Employment benefits and projections
- 16.6 additional jobs by 2025, of which 14.3 in MENAP countries and 2.3 in CCA countries.  
- Productivity and employment gains from increased access to financing are higher for SMEs than for large firms (literature evidence: Ayyagari and others 2016; Beck and others 2008; Berton and others 2018).  
- Taking the introduction of credit bureaus in a sample of 70 developing economies as a positive credit shock, improved access to financing increased employment growth by about 3.5 percentage points among micro, small and medium enterprises, compared with only 1.2 percent for larger firms (Ayyagari and others 2016).

### Growth benefits of closing SME financial inclusion gaps
- Bhattacharya & Wolde (2010) point estimate: closing the gap between the average level of access to financing in the MENAP region and the world average is associated with an additional 0.1 percent in the rate of annual growth (all else equal).  
- Marginal growth benefits from financial inclusion decline as financial development and inclusion increase (Sahay and others 2015; Arcand, Berkes, and Panizza 2015; de la Torre, Ize, and Schmukler 2011).  
- Very low financial inclusion in the MENAP and CCA regions implies significant untapped potential for growth through increased SME access to financing.

### Macroeconomic policy effectiveness and fiscal/monetary transmission
- Household financial inclusion is associated with higher revenue and expenditure as a share of GDP and can amplify the fiscal multiplier (IMF 2018b).  
- Greater SME financial inclusion:
  - strengthens tax revenue response to a positive output gap shock (see Figure 5, Annex 6);  
  - enhances monetary policy transmission—impulse response of the output gap to a nominal interest rate shock tends to be stronger in countries with high SME financial inclusion;  
  - increases central banks’ aversion to inflation (measured by the ratio of variance of the output gap and inflation).  
- IMF (2018b) and Mehrotra and Yetman (2014) provide supporting evidence that financial inclusion improves monetary transmission and price stability.

### Financial stability considerations
- Greater extension of credit to SMEs can improve bank portfolio diversification and support financial stability if accompanied by strong risk management and financial supervision.  
- SME credit is a relatively risky asset class; rapid growth in SME credit may lead to a buildup of unsound credit exposure.  
- Managing the trade-off between inclusion and stability requires proper institutional safeguards, sound financial supervisory frameworks, and strong credit discipline and risk management standards.

### Public sector role and macro-financial determinants of SME access
- A higher share of public investment in total investment is negatively correlated with SME financial inclusion:
  - In the MENAP region, a one percent increase in public investment may lead to a 0.7 percent decline in SME financial inclusion (against an EMDE average of 0.2 percent).  
  - Public investment represents on average 34 percent of total investment in MENAP countries (against 24 percent in other EMDEs).  
- Greater government effectiveness is associated with improved SME access to finance; association is stronger in MENAP (and to a lesser extent CCA) than in other regions.  
- Large government and SOE financing needs can crowd out credit to the private sector, including SMEs. In MENAP, credit to government and SOEs (as a percent of GDP) is higher than in other regions; in CCA it is lower.  
- Price stability is positively associated with SME access to financing; analysis confirms a negative relationship between inflation and SME financial inclusion.

### Financial sector characteristics and competition
- Financial sector soundness positively correlates with SME financial inclusion:
  - Bank resilience (e.g., bank Z-scores and reliance on core funding) supports SME access to financing; weak asset quality undermines it.  
  - The importance of soundness factors appears stronger in MENAP than in other EMDEs.  
  - In Azerbaijan and Kazakhstan, low asset quality (nonperforming loan ratios of about 20 percent) seems to limit the financial sector’s contribution to growth.  
- Lack of bank competition reduces SME access to financing; MENAP—and in particular Gulf Cooperation Council countries—lag in bank competition. Facilitating market entry could improve SME credit access.  
- High banking sector concentration in MENAP is often associated with higher interest rate margins and bank profitability, which may discourage lending to smaller firms.

### Institutional aspects: governance, regulation, and credit information
- Governance:
  - Control of corruption, voice and accountability, and political stability are positively correlated with SME financial inclusion.  
  - The importance of corruption and political risks is particularly strong for MENAP countries.  
- Financial regulation and supervision:
  - Strong supervisory capacity effectively contributes to SME financial inclusion, especially in MENAP.  
  - Financial inclusion and AML/CFT can be mutually supportive because formal financial services improve transaction traceability.  
- Credit information:
  - Credit information quality and availability are key for SME access to formal financing, reducing collateral requirements and borrowing costs.  
  - If credit bureau coverage increased to the EMDE average in MENAP and CCA countries, it would raise employment by 1 percentage point for all firms and by 1.2 percentage points for SMEs (Figure 9).  
  - Country-specific analysis suggests larger gains where credit registry coverage is lower.  
- Business environment:
  - Weak property rights, contract enforcement, high business start-up costs, and ineffective insolvency regimes are negatively correlated with SME financial inclusion.  
  - In countries with very high collateral requirements (such as Armenia, Azerbaijan, and Tunisia, whose average collateral requirements can be as high as 250 percent of loan value), better credit information could relax constraints and unlock SME financing.  
  - In the Kyrgyz Republic, obstacles to credit monitoring are very large and associated with particularly elevated interest rate margins (close to 20 percent).

*Source: Annexes and chapters as presented in the provided PDF content.*

### Annex 5 provides details on the estimates.

### fisfmecaea - Annex 5 provides details on the estimates.

### Key priorities to boost SME financial inclusion in MENAP and CCA
- Economic development (income per capita) explains the largest share of the financial inclusion gap in MENAP and CCA countries; it captures country characteristics such as quality of infrastructure, education, and health.
- Governance (control of corruption) is the second most important determinant of SMEs’ limited access to formal financing in the two sub-regions.
- Credit information availability (coverage of credit registries) plays a key role in SME access to finance.
- Economic competition (proxied by the share of small firms in the private sector) indicates that market distortions hamper SME growth, demand for credit, and access to financing.
- Business environment, including legal and institutional frameworks that facilitate enforcement of property rights and contracts, affects SME activity and access to financing by raising the cost of doing business.
- Insolvency regimes, credit information, and collateral frameworks are critical institutional elements affecting SME finance.

### Empirical findings and literature-based evidence
- Cross-country studies find creditor protection and credit registries are important determinants of private credit (Djankov, McLiesh, and Shleifer 2007).
- An index of credit bureau data quality improvements raises credit availability and reduces its cost (Brown, Jappelli, and Pagano 2009).
- Some loan-level studies show mandatory information sharing can reduce credit at the extensive and intensive margins (Bos, De Haas, and Millone 2016).
- Introduction of collateral registries for movable assets can increase the likelihood of firm access to bank financing by 10 percentage points, while reducing lending rates and increasing loan maturities (Love, Martinez Peria, and Singh 2016).
- Relaxing collateral constraints has beneficial impacts on GDP across all countries (Dabla-Norris and others 2015b).
- Insolvency regimes are often too costly, time-consuming, and inefficient in middle-income countries, especially in countries with legal systems of French origin (Djankov and others 2008).

### Economic fundamentals and banking-sector features
- Higher incomes and better physical infrastructure increase savings and the pool of available funds, as well as access to financing (Dabla-Norris and others 2015a).
- Education is a significant determinant of household ownership and use of accounts in the formal financial system (Allen and others 2012).
- Better governance can help enforce financial contracts for SMEs, facilitating access to financing (Rojas-Suárez and Amado 2014).
- Macro-financial instability can dramatically affect credit and other financial services to SMEs, as banks restore capital ratios by curtailing credit, especially to riskier borrowers (Rojas-Suárez 2016).
- Strong banking competition and low information asymmetries facilitate SME financial inclusion (Love and Martinez Peria 2015).
- Banking sectors in the MENAP region are less competitive than in most other developing economies (Anzoategui, Martinez Peria, and Rocha 2010).
- Weak competition, high concentration, and prevalence of public ownership in the banking sector are highlighted as key constraints on SME financing in Gulf Cooperation Council countries (World Bank 2016).

### Potential role of alternative financing channels
- Capital markets can serve SME financing needs directly and indirectly by channeling funding to intermediaries that address microeconomic challenges of lending to small businesses.
- Fintech can facilitate SME financing as an alternative source and by supporting bank credit supply and opening new lending channels.
- Cross-country experience shows a range of policy and institutional conditions are required to develop capital markets and fintech channels in MENAP and CCA countries.

### Capital markets: constraints and ecosystem requirements
- Weak savings mobilization through the formal financial system is an impediment to SME capital market development in MENAP and CCA regions.
- Household saving rates in the formal financial system are low by international standards.
- The size of institutional investors, including mutual funds, insurance companies, and pension funds, is comparatively limited.
- Bond issuance is largely limited to governments and large corporations; broader capital markets are underdeveloped.
- A full ecosystem for SME capital markets requires:
  - Adequate macroeconomic policy frameworks and macroeconomic stability.
  - A large and diversified investor base and gradual development of broader capital markets.
  - Financial infrastructure, legal frameworks, and regulatory and supervisory frameworks adapted to SMEs’ specific needs.
  - Specific policies and institutional measures such as incubators, accelerators, tax incentives, public guarantees, information sharing, proportionate regulatory requirements for SME-specific issuance platforms, SME corporate governance standards, and financial literacy programs.

### Fintech examples and evidence
- In the United Kingdom, regulatory measures after the global financial crisis led to growth in peer-to-peer lending for SMEs from fewer than 1 percent of new SME loans in 2014 to more than 3 percent by 2017.
- Alibaba: proprietary data and internet-based SME services allowed securitization of a loan portfolio of more than RMB 200 billion for more than 800,000 SMEs (IOSCO 2014). Alibaba’s MYbank, established in 2015, by 2017 had extended RMB 441.3 billion in SME loans (Reuters 2018).

### Policy implications and actionable reforms
- Prioritize policies that raise income per capita through improvements in infrastructure, education, and health to address the largest share of the SME financial inclusion gap.
- Strengthen governance and control of corruption to improve enforcement of financial contracts and reduce barriers to SME finance.
- Expand credit information coverage and improve credit registry quality to increase credit availability and reduce costs.
- Reform insolvency regimes to reduce costs and time for resolution, particularly addressing inefficiencies in systems of French legal origin.
- Relax collateral constraints and develop collateral registries for movable assets to increase SME access to bank financing and improve loan terms.
- Foster banking competition and reduce market concentration and public ownership where appropriate to increase SME access to credit.
- Develop capital market infrastructure and institutional investor bases to create indirect channels for SME financing (including debt and asset-backed securities, equity segments, and specialized funds).
- Leverage fintech innovations with proportionate regulatory frameworks to expand alternative lending channels while managing risks.

- Key statistics and measures cited:
  - Strength of Legal Rights Index scale: 0–12 (12 is the best performance).
  - Alibaba loan portfolio: more than RMB 200 billion for more than 800,000 SMEs.
  - MYbank SME loans by 2017: RMB 441.3 billion.
  - UK P2P SME lending share: fewer than 1 percent of new SME loans in 2014; more than 3 percent by 2017.
  - Collateral registries introduction effect: increase in likelihood of firm access to bank financing by 10 percentage points.

*Source: fisfmecaea - Annex 5 provides details on the estimates.*

### Box 4. NewConnect in Poland: SME Stock Exchange

### Box 4. NewConnect in Poland: SME Stock Exchange

### Credit information and real-time credit scoring
- Big data analytics and cloud-computation facilitate the gathering and processing of large amounts of consumer credit performance and behavioral data (for example, from social media, psychometric information, and retail receipts).
- For SMEs, credit analysis can rely on artificial intelligence and machine learning that combine SME registration and accounting information with geographic and socioeconomic information.
- Such data help generate real-time credit scores and profiles and underpin stronger credit risk management.
- Blockchain technology can improve information management related to collateral registry and ownership and provide security, privacy, and transparency in decentralized open-source platforms.
- Footnote references in source: 5.

### Enhancing competition among SME financial-service providers
- New platforms (example: Souqalmal in the United Arab Emirates) allow borrowers to compare credit cards, insurance, leasing, and other SME banking products.
- Open banking platforms enable third-party providers to access bank customer data (with consent) and offer competing products.
- In the United Kingdom, the nine largest banks were required to share SME data with external parties, helping to boost alternative lending channels.
- Footnote references in source: 6.

### Opening new channels of SME financing (fintech business models)
- Fintech enables scaling up of crowdfunding, peer-to-peer lending, and other channels.
- Figure 16 typology (examples from source):
  - P2P/Marketplace business lending — Examples: Lending Club (USA), Beehive (USA)
  - Equity-based Crowdfunding — Examples: Crowdfinance (UK), Eureeca (UAE)
  - Reward/donation-based Crowdfunding — Examples: Kickstarter (USA), Zoomaal (Lebanon)
  - Balance sheet business lending — Examples: OnDeck (USA), CAN Capital (USA)
  - Invoice lending — Examples: BlueVine (USA), MarketInvoice (UK)
  - Merchant and e-commerce finance — Examples: Amazon (USA), Alipay Financial (China)

### Regulatory Technology (Regtech) and compliance efficiency
- New technologies can help lower regulatory compliance costs, a key obstacle to SME credit (for example, AML/CFT due diligence for new accounts increases SME servicing costs).
- Fintech solutions (examples: Suede and BearingPoint (Abacus)) can reduce compliance costs by embedding regulatory requirements into IT protocols and allowing for real-time compliance monitoring.
- Know-your-customer and AML/CFT procedures can be made more efficient by analyzing digitalized client and partner transaction data and writing contracts on distributed ledgers (example: Trulioo).
- Footnote references in source: 7.

### Fintech in the MENAP and CCA regions: state and prospects
- Fintech is nascent but accelerating in recent years in MENAP and CCA.
- The UAE, Lebanon, Jordan and Egypt host three-fourths of the MENAP startups and have established large fintech accelerators.
- In the CCA region, fintech development has been concentrated mostly in Kazakhstan.
- Fintech companies in both regions have focused primarily on payment solutions, marketplace lending, and crowdfunding, including for SMEs.
- Drivers of fintech growth in some countries: availability of private capital; government measures (funding support, regulatory and legal frameworks for accelerators and incubators, and for foreign investors) — cited examples include UAE and Kazakhstan.
- In some countries, mistrust in traditional banking systems contributed to mobile payment solutions development (examples: Afghanistan, Somalia, and Tajikistan).
- Constraints limiting fintech-based SME finance demand: difficulties in hiring and retaining talent; limited availability of private capital; low financial literacy.
- Recommendation: Legal and regulatory frameworks that address these constraints while protecting financial stability and consumer protection would help promote innovation and financial inclusion in both regions.
- Footnote references in source: 8, 9.
- Regional firm examples cited: Bahrain-based PayTabs; Jordan-based ProgressSoft and eFAWATEERcom; UAE-based Beehive and Eureeca; Lebanon-based Zoomaal; Jordan-based Liwwa.

### Risks introduced by fintech and regulatory responses
- New risks in credit activities:
  - Large quantities of data collected by online platforms create data privacy and cybersecurity risks.
  - Elevated consumer protection and fraud concerns; instances of large-scale investor losses have been observed.
  - Resilience of fintech technologies has not been tested through a full economic cycle.
  - Many lending platforms rely on short-term funding, which may aggravate the procyclicality of fintech credit institutions in times of liquidity pressure.
- Regulatory approaches vary:
  - From applying the same standards as other financial institutions to sector-specific regulation; many countries have not yet adopted a specific regulatory framework.
  - Some jurisdictions (Singapore, United Arab Emirates, United Kingdom, among others) have introduced incubators—regulatory sandboxes, innovation hubs, and business accelerators—where fintech companies can test models on a small scale.
  - The Financial Conduct Authority of the United Kingdom introduced a global sandbox initiative resulting in the Global Financial Innovation Network.
  - As of August 2018, the Global Financial Innovation Network (GFIN) comprises 12 regulatory bodies across the world, including the Abu Dhabi Global Market, Central Bank of Bahrain, and the Dubai Financial Services Authority.
- Footnote references in source: 10, 11, 12, 13.

### Fintech ecosystem building blocks and illustrative initiatives
- Key policy and institutional conditions to build fintech ecosystems (elements cited in Figure 17):
  - Infrastructure: digital payments systems, data connectivity and internet use.
  - Legal system and permitting legal frameworks.
  - Government policies: fintech and innovation in state development programs; financial free zones.
  - Regulatory environment: level-playing field for newcomers to SME lending; digital incubators and accelerators.
  - Financial and digital literacy.
- Jurisdiction examples highlighted in Figure 17:
  - Singapore — fintech and innovation in state development programs; digital incubators and accelerators.
  - UAE — financial free zones; Fintech Hive accelerator (the Hive) launched in 2017 at the Dubai International Financial Centre; innovation testing license to allow start-up fintech companies to grow and test products; some Hive cohort participants later receive licenses from the financial services authority.
  - China — digital payments systems.
  - UK — level-playing field for newcomers to SME lending; regulatory initiatives.
- The Dubai Financial Services Authority uses open-market consultations to develop regulations (example: crowdfunding platform rules) and joined the Global Financial Innovation Network in 2018.
- Result: Dubai International Financial Centre hosts fintech companies that provide SME financing, such as Eureeca (equity) and Beehive (crowdfunding-based lending platform).

*Source: IMF staff content from the provided PDF content unit.*

### Box 5. Dubai International Financial Centre and Fintech Development

### Box 5. Dubai International Financial Centre and Fintech Development

### Potential Role of Alternative Financing Channels
- Financial inclusion is a top policy priority in many countries; holistic reform strategies are required to deliver more meaningful, safe, and sustainable access to financing for SMEs than partial approaches.
- Holistic approaches can trigger a virtuous circle of greater SME transparency and reduced informality, bringing broader economic benefits.

### Current Policy Initiatives — Direct Intervention
- Common direct interventions to boost SME financial inclusion include targeted lending by state-owned banks, SME credit guarantees, and interest rate regulations.
- State-owned banks:
  - May enhance access to credit and play a countercyclical role in times of stress.
  - Frequently associated with low efficiency, concentration risk, high interconnectedness, politically directed lending, weak governance and asset quality, and regulatory forbearance.
  - Key success conditions: regulation and supervision equivalent to private banks and assurance they do not crowd out private credit.
- Credit guarantee schemes:
  - Have expanded since the global financial crisis; World Bank principles guide their design.
  - Evidence indicates they contribute to financial inclusion and can enable SME access to credit during challenging times.
  - Potential drawbacks: may weaken credit discipline, crowd out unsecured loans, and not always generate additional or financially sustainable SME credit.
  - Design recommendations: establish as independent entities with clearly defined objectives and adequate funding; sound governance; strong credit risk management; proper supervision; evaluate and publicly disclose performance on outreach, additionality, and financial sustainability.
  - Definitions used: outreach (capacity to meet SME demand; e.g., number of guarantees issued and total outstanding guarantees); additionality (financial and economic additionality); financial sustainability (capacity to maintain adequate capital base relative to liabilities).
- Interest rate caps:
  - Widely used to lower credit cost and protect consumers, but often have unintended consequences.
  - Case studies (Ferrari, Masetti, and Ren (2018)) indicate interest rate caps can lead to lower credit supply and approval rates for small and risky borrowers, higher lending fees and commissions, less price transparency, fewer institutions and reduced branch density, and adverse impacts on bank profitability.

### Financial Inclusion Strategies (national approaches and recent MENAP/CCA experience)
- A growing number of countries have introduced financial inclusion strategies as part of broader financial development strategies; success factors include coordination across government agencies, private sector consultation (often led by central banks), and regulatory reforms for information sharing, contract enforcement, and insolvency regimes.
- World Bank 2017 Global Financial Inclusion and Consumer Protection Survey: a quarter of countries have developed such strategies recently, and another quarter are preparing new ones.
- MENAP and CCA regional developments:
  - Many jurisdictions accelerated implementation of financial inclusion strategies in recent years; few had such strategies in 2015–16 but many have since deployed initiatives to improve financial access regulation.
  - Country examples:
    - Georgia (2016): Georgia 2020 development strategy supporting inclusive growth and greater SME financial access; actions include comprehensive credit registry, revamped corporate accounting standards and insolvency procedures, domestic capital market support, and financial education strategy; authorities announced plans to ease SME financing via a credit guarantee scheme.
    - Pakistan: National Financial Inclusion Strategy 2016–20 aims to bring SME share in private sector bank loans to 15 percent by 2020; actions include credit guarantee scheme for small farmers, expansion and modernization of online credit information bureau, revised prudential regulations for SME financing, and common technology to support digital transaction accounts in rural areas.
    - Jordan: National Financial Inclusion Strategy 2018–20 aims to enhance inclusion for SMEs through microfinance and digital financial services, promote financial literacy, and strengthen consumer protection; new credit bureau (January 2016) compiling SME credit information and, after accumulating three years of historical data, expected to provide SME credit scores to expedite credit risk assessments.

### Need for Holistic Policy Approaches
- SME financial inclusion drivers are complex and interconnected; safe and sustainable inclusion requires comprehensive, country-tailored strategies that combine macroeconomic, financial, legal, and regulatory reforms.
- Partial approaches (focusing only on public financing or guarantees) are unlikely to yield large or durable benefits.
- The paper’s framework (building blocks in Figure 18) should be treated as mutually reinforcing rather than strictly sequential; reforms can progress in parallel based on country priorities.
- Areas for further refinement and benchmarking: influence of economic structure (commodity-exporting vs. agriculture- or service-based economies), SME informality, interagency coordination, supervisory practices, and bankruptcy frameworks.

### Framework Building Blocks and Policy Priorities
- Macro-financial and institutional requirements to scale up SME access to bank credit:
  - Limit the relative size of the public sector to avoid crowding out SME credit.
  - Macroeconomic stability.
  - Sound and competitive banking systems.
  - Competition in the broader economy.
  - Strong and stable institutions, including low corruption and political risk.
  - Sound financial regulatory and supervisory frameworks with incentives for SME financing.
  - Availability of credit information.
  - Strong legal frameworks (property rights, contract enforcement, collateralization, insolvency).
- Policies to develop alternative channels of SME financing:
  - Development of capital market instruments to mobilize savings and channel them to SMEs (directly or via intermediaries).
  - Large and diversified investor base and broader capital market development.
  - Adequate financial infrastructure and legal frameworks.
  - Regulatory and supervisory frameworks supporting safe development and integrity of capital markets and fintech-supported SME financing.
- Coordination with regional and international organizations can support these reforms (Box 6 outlines key partners).

### Role of Regional and International Organizations (summary of engagement)
- Multilateral and regional development institutions provide technical assistance, financing, advisory services, credit enhancement, task forces, and forums to support SME financing, financial infrastructure, and policy learning across countries in MENAP and CCA.

### Annex — SME Financial Inclusion Index and Empirical Findings
- Construction of the SME financial inclusion index:
  - Steps: (1) normalization of variables; (2) aggregation of normalized variables into sub-indices by principal component analysis using the first component; (3) aggregation of subindices into the final index.
  - Variables selected from World Bank Enterprise Survey relevant to bank financing conditions, divided into access and usage categories.
  - Index coverage: 119 countries worldwide, of which 20 are in the MENAP and CCA regions.
  - The index correlates strongly with alternative measures: share of partially or fully credit-constrained SMEs (Kuntchev and others, 2014) and share of SMEs with rejected loans.
- Annex Figure and relationships:
  - Annex Figure 1.1 lists contributing variables: Percent of firms with a bank loan/line of credit; Percent of firms with a checking or savings account; Percent of firms using banks to finance investments; Percent of firms using banks to finance working capital; Proportion of investments financed by banks (in percent); Proportion of working capital financed by banks (in percent).
  - Annex Figure 1.2 shows SME Financial Inclusion Index versus share of partially/fully credit constrained firms and versus percentage of SMEs with rejected loans.
- Determinants and SME financial inclusion gaps:
  - Financial inclusion is driven mainly by macroeconomic and institutional fundamentals:
    - Economic development (income per capita).
    - Governance (control of corruption).
    - Credit information availability (coverage of credit registries).
    - Economic competition (proxied by the share of small firms in the private sector).
    - Business environment, including contract enforcement.
  - SME financial inclusion gaps are calculated as the difference between countries’ actual inclusion level and that of the country at the 90th percentile.
- Annex Table 2.1. SME Index (regression results reproduced exactly as presented):
  - Variables (1) Model 1
  - Log of PPP GDP per capita 0.0773***
    - (0.00951)
  - Time required to enforce a contract (days) 20.000130***
    - (0.00004)
  - Small-firm share of total firms 20.207**
    - (0.09470)
  - Control of corruption: estimate 0.0709***
    - (0.02450)
  - Public credit registry coverage (% of adults) 0.00429***
    - (0.00143)
  - Observations 119
  - R squared 0.912
  - Note: Standard errors are in parentheses. PPP 5 purchasing power parity. ***p < 0.01; **p < 0.05; *p < 0.1.
- Growth and unemployment regressions:
  - Estimated equations (as presented):
    - (1) Growth_it = α + β FI_it + λ X_it + γ_i + ω_t + ε_it
    - (2) Unempl_it = α + β FI_it + λ X_it + γ_i + ω_t + ε_it
  - Growth is real GDP; Unempl is unemployment; FI is SME financial inclusion measure (financial inclusion index or bank loans to SMEs); X is vector of control variables; γ_i and ω_t are country and time fixed effects; ε_it is the error term.
  - Estimation approaches: panel fixed effects, GLS with AR(1) correction, and dynamic generalized method of moments to address potential endogeneity (data on loans to SMEs permit a longer time series for dynamic GMM).

*Source: IMF staff compilation from the content unit.*

### Annex 3. Growth and Employment Benefits

### Annex 3. Growth and Employment Benefits

### Empirical evidence: SME lending and unemployment
- Annex Table 3.1 (dependent variable: unemployment rate (log)) — Loans to SMEs (log):
  - FE (1): 0.0169 (0.0222)
  - GLS (2): 20.0700*** (0.0140)
  - GLS (3): 20.045*** (0.014)
  - GMM (4): 20.136*** (0.0472)
  - GMM (5): 20.131*** (0.042)
- Other notable covariates reported in Table 3.1 (selected):
  - Education (log): estimates range from 20.212 (0.241) to 0.279** (0.131)
  - GDP (log): estimates include 20.448*** (0.0633) and 20.234*** (0.072)
  - Inflation (log): 20.0394*** (0.0130) to 20.021*** (0.005)
  - Lagged unemployment rate (log): 0.269*** (0.0283)
- Table notes:
  - Standard errors in parentheses. Country and year fixed effects included but not reported.
  - GLS estimates incorporate AR(1) correction. GMM uses at most four lags for instruments.
  - FE = fixed effects.
  - Significance: ***p  0.01; **p  0.05; *p  0.1.

### Growth benefits: SME financial inclusion and GDP growth
- Annex Table 3.2 (dependent variable: real GDP growth / Real GDP (log)):
  - Loans to SME growth:
    - FE (1): 0.00516 (0.005)
    - GLS (2): 0.01067*** (0.003)
    - GMM (3): 0.08298*** (0.023)
    - GMM (4): 0.05193*** (0.007)
  - SME financial inclusion index (log): 0.056** (0.023) and 0.060** (0.024) in reported specifications
- Selected control estimates from Table 3.2:
  - Gross fixed K formation growth: 0.00035*** (0.000) and 0.00039*** (0.000)
  - Health & education: 0.124*** (0.044) and 0.103** (0.043)
  - Voice & accountability: 0.05089*** (0.018)
  - Inflation: 20.00067*** (0.000) and 20.00052*** (0.000)
  - Money growth: 0.00190*** (0.000) and 0.00125*** (0.000)
  - Global financial crisis (2007–09): 20.03242*** (0.005) and 20.02836*** (0.004)
- Table notes:
  - Standard errors in parentheses. Country and year fixed effects included but not reported.
  - GLS estimates incorporate AR(1) correction. GMM instruments limited to four lags.
  - Hansen P values reported where applicable.

### DSGE model simulations: channels and country examples
- Model used: dynamic stochastic general equilibrium (DSGE) model in Dabla-Norris and others (2015b).
- Key financial frictions assessed:
  - Fixed financial access cost (ψ): incorporates asymmetric information, higher cost of serving SMEs, and limited financial literacy; relaxing ψ can substantially raise the share of firms with access to credit and long-term output. Countries highlighted: Egypt, Pakistan, Uzbekistan — could improve long-term output by several percentage points by mitigating ψ.
  - Collateral requirements (λ): limits moral hazard and supports stability, but can exclude small entrepreneurs or force suboptimal scale. Countries highlighted: Armenia, Georgia — loosening λ could yield significant benefits.
  - Monitoring cost (χ): captures efficiency of banks in assessing credit risk and collateral recovery; lowering χ reduces lending-deposit spreads and can encourage expansion but may increase risk-taking; model finds this channel has relatively small macroeconomic impact for sample countries.
- Model caveat:
  - The model applies the same probability of failure (p) to all entrepreneurs regardless of talent or firm size; thus greater financial inclusion does not mechanically raise portfolio risk in the model.

### Stylized model outputs (comparative statics)
- Part I: Financial inclusion indicators (World Bank Enterprise Survey, World Development Indicators, IMF staff calculations) — cross-country variation in:
  - Firms with a bank loan/line of credit (percent of total firms)
  - Value of collateral needed for a loan (percent of the loan amount)
  - Lending-deposit interest rate spread (percent)
  - Nonperforming loans (percent of total loan portfolio)
- Part II: Model-simulated comparative statics (MCD average):
  - GDP and total factor productivity reported as ratios relative to the most constrained case (horizontal axis normalized between 0 and 1 for frictions).
  - Parameter ranges described:
    - Monitoring cost (χ) ranges from 0.5 (implying a lending-deposit spread as high as 60 percent in some countries) to 0 (implying almost zero spread).
    - Collateral requirement (leverage ratio λ) varies between 1 (no borrowing) and 2 (borrowing allowed up to the amount of collateral).
    - Financial access cost (ψ) varies from 3 (share of firms with credit approaching 0 percent) to 0 (share of firms with credit approaching 100 percent).

### Firm-level analysis: employment, productivity, and macro translation
- Firm-level specification (Ayyagari and others (2016) approach):
  - ∆Eijt = α Fijt + B Xijt + Zjt + Cj + Yt + εijt, where ∆Eijt is annual employment (or labor productivity) growth; Fijt indicates if firm had a formal loan outstanding; Xijt and Zjt are firm and country controls; Cj and Yt are country and year fixed effects.
- Empirical findings:
  - Point estimates for α are positive and statistically significant with p-values below 10 percent for SMEs and large firms; SMEs show larger employment gains from access to financing.
- Macroeconomic translation (growth accounting exercise):
  - Additional 1.3 percent in SME employment growth, plus an augmented labor productivity gain of 2.3 percent (with a labor share equal to two-thirds) implies an additional 1 percent of GDP growth.
  - Employment implications: about 16.5 million new jobs in MENAP and CCA by 2025 above the baseline projection:
    - 14.3 million in MENAP
    - 2.3 million in CCA
  - Baseline employment projection follows the average annual growth rate from 2012 to 2017 (International Labour Organization employment data).
- Credit bureau simulation:
  - Replacing Fijt with CBjt (credit bureau coverage proxy based on share of adults covered) yields results consistent with positive employment impacts from financial inclusion, with SMEs a key driver.
  - The α point estimate for SMEs is similar to that for the overall sample with similar statistical significance.
  - Used point estimates to calculate average employment growth gains from closing the credit bureau coverage gap relative to average emerging market and developing economy and to average advanced economy benchmarks.

### SME financial inclusion and macro policy effectiveness
- Fiscal policy (panel VAR by SME financial inclusion group):
  - Y = {Tax/GDP, output gap, inflation}; tax collection efficiency measured as impulse response of Tax/GDP to a positive structural shock to output gap.
  - Finding: high-financial-inclusion countries present a statistically significant (at 10 percent level) first-lag response; low-financial-inclusion countries do not.
  - Country coverage: Armenia, Azerbaijan, Egypt, Georgia, Iraq, Jordan, Kazakhstan, Kyrgyz Republic, Lebanon, Morocco, Tajikistan, Tunisia, Uzbekistan, Yemen.
- Monetary policy transmission (panel VAR following Mehrotra and Yetman (2014) and IMF (2018a)):
  - Y = {output gap, inflation, nominal interest rate}; measure is impulse response of output gap to a 100 basis point structural shock to the nominal interest rate.
  - Finding: statistically significant at the 10 percent level only for high-financial-inclusion countries.
  - The ratio of the variance of the output gap to inflation is higher for higher SME financial inclusion group, supporting the hypothesis that SME financial inclusion strengthens monetary policy effectiveness.
- Group tests:
  - Top and bottom halves did not present statistically significant results in some robustness checks.

### Drivers of SME financial inclusion (empirical specification)
- Two baseline equations estimated (ordinary least squares):
  - (1) FIit = α + β Xit + λ region_dummy + ρ zit + εit
  - (2) FIit = α + β Xit + λ region_dummy + γ region_dummy * zit + ρ zit + εit
  - FI = composite index of SME financial inclusion; X includes total investment (percent of GDP), inflation, SME share of employment (percent of total employment), and level of economic development; region dummy = MENAP or CCA.
- Additional sets of controls explored:
  - Broader macroeconomic environment: diversification (Economic Complexity Index), informality (share of shadow economy), competition, quality of infrastructure (share of telephone lines), saving behavior, interest rate restrictions, public investment (percent of total investment), fiscal balance, oil-exporter dummy.
  - Quality of institutions: voice and accountability, political stability, government effectiveness, control of corruption.
  - Banking sector characteristics: return on equity, asset quality (nonperforming loan ratios), bank deposits, banking sector stability, banking sector concentration.
  - Business environment: taxation (percent of profit), cost of starting a business and registering property, time to enforce a contract, public credit registry coverage, property rights.
- Stylized regional facts (Annex Figure 7.1):
  - MENAP and CCA generally perform poorly on governance and structural indicators compared with peers (voice and accountability; political stability and absence of violence/terrorism; control of corruption; informality; diversification; infrastructure).

*Source: IMF staff calculations.*

### Annex 7. Drivers of SME Financial Inclusion

### Annex 7. Drivers of SME Financial Inclusion

### Macrofinancial environment and SME financial inclusion (Annex Figure 7.2)
- Coefficient estimates (labels and values as presented):
  - Infrastructure: 0.279
  - NPLs: 0.153
  - Competition: 0.141
  - Diversification: 0.351
  - Informality: 0.222
  - Inflation: 0.067
  - Public investment (%total): 0.093
  - Government effectiveness: 0.086
  - Bank deposit (%GDP): 0.086
  - Bank Z-score: 0.086
  - Bank return on equity: (value group shown) –0.0100.03
- Additional coefficient sequence shown (region markers CCA, MENA, Sample average indicated in figure):
  - –0.003–0.0130.0070.0170.0270.0370.047
- Institutional and business environment labels included in the figure:
  - Voice & accountability
  - Political stability
  - Control of corruption
  - Public credit registry coverage
  - Regulatory and supervisory capacity for financial inclusion
  - Regulatory and supervisor capacity of deposit-taking activities
  - Capacity of regulatory agency
  - Cost of business start-up procedures
  - Cost to register a property
  - Time required to enforce a contract
  - Property rights
  - Tax burden (% of profit)
- Note on methodology and significance:
  - Source: IMF staff estimates.
  - Coefficient estimates from equations (1) and (2), based on OLS panel fixed effects.
  - The coefficients are statistically significant at a minimum level of 10%, with robust standard errors.

### Institutions, business environment, and SME financial inclusion (Annex Figure 7.3)
- Coefficient values shown in figure:
  - 0.07
  - 0.07
  - 0.071
  - 0.047
  - 0.239
  - 0.129
  - 0.119
  - 0.116
  - 0.102
  - 0.102
  - 0.041
  - 0.122
  - 0.064

### Key implications and analytic focus (from figures and notes)
- Macroeconomic and banking-sector variables (infrastructure, NPLs, competition, diversification, informality, inflation, public investment, government effectiveness, bank deposits, bank Z-score, bank return on equity) are quantitatively associated with SME financial inclusion, with coefficients reported above.
- Institutional and business-environment factors (voice & accountability, political stability, control of corruption, public credit registry coverage, regulatory and supervisory capacities, costs and time of business registration and contract enforcement, property rights, tax burden) are measured and reported with coefficients in the figures above, indicating their role as drivers of SME financial inclusion.
- Results are based on panel OLS with fixed effects and robust standard errors; coefficients reported are statistically significant at least at the 10% level.

*Source: IMF staff estimates; coefficients from equations (1) and (2), based on OLS panel fixed effects (figures and notes as presented in the source).*

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_Source: https://www.imf.org/-/media/files/publications/dp/2019/english/fisfmecaea.pdf_