## wpiea2020135-print-pdf ## Source details **Canonical URL:** [wpiea2020135-print-pdf](https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020135-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2020/english/wpiea2020135-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2020/english/wpiea2020135-print-pdf.pdf.json) --- ### Context and objectives - Development of micro, small and medium-sized enterprises (SMEs) is central to achieving inclusive growth in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region due to high youth unemployment, declining public sector absorption of labor, lower and volatile oil prices, and widening income disparities. - The study addresses four principal questions: - Why did strategies to promote SME development in MENAP have a limited impact on growth and employment creation? - Can digital technologies usher in a new era of resilience, growth and quality employment generation among SMEs? - How digitalized are MENAP SMEs and what constraints do they face in digitalizing their businesses? - What policy mix can enable SMEs to leverage digital technologies to boost growth and achieve inclusive growth, and what role should the government play? - Geographic coverage: review covers 21 of the 24 MENAP countries; the three not covered are Syria, Libya and West Bank and Gaza (WBG). - Definition: Digitalization defined as “the use of data, digital technologies and interconnections to create business or change existing activities.” ### Structure, performance and sectoral composition of MENAP SMEs - SMEs account for over 90 percent of total businesses on average in MENAP. - SME employment share ranges from the low teens in Algeria to more than 50 percent in several countries (Bahrain, UAE, Iran, Jordan, Lebanon, Egypt, Pakistan, Tunisia). - SME contributions to GDP range from a low of 10 percent in Qatar to more than 70 percent in some oil-importing countries (Egypt, Tunisia, Yemen). - SMEs are heterogeneous; most are concentrated in services such as trade, retail distribution, and simple contracting—activities characterized as low entry cost, low value-adding and low paying. - Participation in global value chains (GVC) is still very low. ### Startup trends and geographic concentration - Investments in startups increased at a compound annual growth rate of 22.5 percent between 2015 and 2019. - The number of startups worth over US$100 million increased between 2015 and 2019 (Magnit 2019). - Startup activity is geographically concentrated: eight countries (Bahrain, Egypt, Jordan, Lebanon, Oman, Saudi Arabia, Tunisia, and UAE) account for over 85 percent of all startups; the UAE alone accounts for a third of the activities. - Despite rapid startup growth, magnitudes of employment creation have not been sufficient to significantly reduce youth unemployment. ### Key constraints impeding SME growth - Principal constraints: limited access to finance, unfavorable business environments, and talent gaps (including weak managerial capacities). - Country-specific constraints include corruption, unreliable electricity, high tax rates, competition from imports, lack of access to public procurement, high interest rates, political instability, and informality. - Factors impeding SME access to finance: - Structural: limited coverage of credit registries and bureaus, weak insolvency regimes, underdeveloped private equity markets. - Policy: restrictive regulations limiting NBFIs and capital markets, excessive government borrowing crowding out private sector. - Bank-side: inadequacies in risk management and slow development of suitable lending products. - SME-side: weaknesses in management skills, lack of collateral, and lack of financial accounts. - SMEs exhibit greater susceptibility to economic shocks due to limited capital buffers, weak governance, and limited digital capabilities. ### Credit risk and non-performing loans (NPLs) - Cross-country data show a positive correlation, albeit moderate, between the level of the NPL ratio and the exposure of the banking system to SMEs. - Non-performing loan (NPL) ratios for SMEs are often much higher than average NPL ratios for overall banking systems. - Nonbank financial institutions (NBFIs) with comparatively large exposures to SMEs exhibit higher levels of NPLs than banks do. ### Policy measures implemented to support SMEs - Most prevalent financial-sector measures: credit guarantee schemes and establishment of credit registries/bureaus—over 80 percent of countries established credit guarantee schemes; over 80 percent established credit registries and/or bureaus. - Selected policy uptake indicators (as presented in Figure 6 table): - Credit guarantee schemes: 84 - Credit registry: 58 - Credit rating: 16 - Credit guarantee: 95 - Modernize insolvency regime: 42 - Establish collateral registry / law for movable collateral: 21 - Specify percentage of bank lending to SMEs: 32 - Micro Finance Institutions (for-profit introduced): 42 - Other reforms to broaden funding: regulations to establish micro-finance sectors (at least nine countries), alternative equity listings for SMEs on stock markets (seven countries), SME-focused funds and venture capital/private equity regulation in some countries, and crowdfunding regulation in three countries. - Policy measures to promote SME credit demand: some countries capped maximum interest rates on SME loans (example: Central Bank of Egypt capped rates ranging from 5 percent for small businesses to 12 percent for working capital for mid-sized firms); some countries provided subsidized interest rates through specialized credit institutions. - All countries created an enabling environment for Islamic banks, which has positive spillovers for SME financing. ### Business registration, institutional support and public procurement - Many countries introduced one-stop shops, online registration platforms, and eliminated or reduced minimum paid-in capital requirements to facilitate business entry. - Countries implementing online business registration, one-stop shops, and paid-in capital elimination include Djibouti, Egypt, Jordan, Kuwait, Mauritania, Afghanistan, Algeria, Bahrain, Morocco, Oman, Pakistan, Saudi Arabia, Tunisia, UAE, Yemen. - Institutional support: formal SME strategies, public and semi-public SME promotion institutions, incubators/accelerators, mandates for specified shares of public procurement to be allocated to SMEs in several countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Egypt, Jordan, Lebanon). - International collaboration: World Bank, European Investment Bank, and MENA-OECD competitiveness program provided policy advice, lending, technical assistance, and capacity building. ### Evaluation of effectiveness and remaining gaps - Systematic evaluations are lacking; policies had positive impacts but fell short of objectives. - Persistent barriers: access to finance, talent gaps, weak managerial capacities, dominance of microenterprises, high SME funding gaps relative to other regions. - Microenterprises predominate the SME universe, generate limited employment opportunities, are low paying and low value-adding, and are not well suited to conventional bank lending. - Partial implementation and design frictions: credit registries and bureaus coverage remain low; insolvency regimes have low recovery rates and lengthy resolution times; accounting and auditing sector reforms were limited; few countries enacted secured transactions laws or established collateral registries. ### Non-bank funding constraints - Nonbank funding sources remain scant due to strategic tensions and lack of enabling regulation. - Stock markets are more suited to medium-large firms, not microenterprises. - Family funding is common in some GCC countries; general preference for ownership reduces willingness to give up equity. - Private equity has increased but remains concentrated on early-stage funding and geographically concentrated; capital for growth stage is scarce. - Microfinance and leasing (including Ijara) have limited penetration: MENA microfinance market size and penetration remain among the lowest globally; Ijara prevalence limited to a few countries. ### Digitalization imperative and observed vulnerabilities - The COVID-19 “great lockdown” revealed SMEs’ vulnerability due to lack of digitalization and inability to operate remotely; digitalization placed at center of recommended rethinking of SME development strategies. - Empirical studies cited indicate technology enhances efficiencies, innovation, access to international markets and productivity (Accenture 2016, OECD 2017, WTO 2019). - Digital technologies can improve SMEs’ access to finance, government efficiencies, and women’s labor force integration, and can facilitate business continuity and resilience to shocks. ### Digital ecosystem pillars (as defined in source) - Infrastructure for Digital Connectivity: international connectivity, national backhaul, last mile access, Internet Exchange Points, fixed and mobile broadband, data centers, devices, software and API. - Digital Skills: basic, intermediate, advanced. - Digital Platforms: public (E-government: P2G, G2P, B2G) and private (E-commerce, social networks, P2P, crowdfunding). - Digital Financial Services: banking, payments and remittances, capital raising and credits; digital payment infrastructure. - Entrepreneurial Culture: willingness to take risk, digitally enabled businesses, venture capital, private equity. - Cross-cutting foundations and regulations: cyber security, data protection and privacy, AML/CFT, data governance, consumer protection, intellectual property rights, competition policy, unbiased AI regulation, regulatory sandboxes, spectrum policies; demand creators (consumer readiness); reliable electricity; e-commerce logistics; digital identification. ### Opportunities and benefits of digitalization for MENAP SMEs - Digitalization can boost SME growth, resilience to shocks, quality employment creation, reduction in poverty and income/gender inequalities, and inclusive growth—contingent on mitigating risks. - Digital solutions can accelerate SME migration from microenterprises to larger firms, enhancing resilience and employment creation. - Broadband internet enables reaching new clients and markets at low cost and business continuity during lockdowns. - IoT and GPS Apps can improve stock management, transportation, and ease logistical challenges for e-commerce. - Cloud-based services reduce ICT upfront capital expenditures, provide ICT expertise, improve digital security, and lower communication costs. - Big data analytics can improve customer service and credit risk assessment, improve AML/CFT compliance, and enable products tailored to SMEs. - Blockchain facilitates faster cross border payments and reliable electronic registries of leased and moveable assets to enable pledging of moveable collateral. - Digital innovations (crowdfunding, P2P) help provide alternative funding sources. - E-government can reduce costs and improve outcomes; digital payments by governments can incentivize mass adoption of digital payments. - Illustrative network effects from technology platforms: Alibaba has 30,000 employees and provides a platform for more than 10 million ancillary jobs; Uber has a few hundred coders but supports around 1 million on-demand drivers. ### Risks and challenges from digitalization - Data becomes an asset that raises challenges around privacy, intellectual property, and security. - Increased connectivity broadens the threat landscape: cybercrime, digital fraud, money laundering, biased AI decisions, fake news and deep fakes. - SMEs lack in-house IT expertise to monitor and secure networks and devices. - Without retooling programs, automation can displace labor and increase unemployment. - Digital dividends can be neutralized if risks are not well managed (IMF 2019). ### Trends in SME digital transformation and uptake - Businesses in MENAP have generally been slow to adopt the internet to boost productivity; consumers moved online earlier than businesses. - Mass internet adoption took off around the mid-2000s in the GCC, but businesses began to digitalize mainly after 2010. - SMEs’ online presence and cloud adoption remain low: - "Only 15-25 percent of SMEs in MENAP had online web presence at the end of 2012" (Deloitte 2014). - E-commerce remains generally small: - E-commerce transactions for the MENA region account for "less than 2 percent of total sales" and "less than 1 percent of the global e-commerce market" (Fabre et al 2019). - "UAE, Saudi Arabia, and Egypt account for 80 percent of the MENA e-commerce market." - Technology startups investment grew at an annual compound growth rate of 36.6 percent. - UAE accounts for 31 percent of all deals and 70 percent of funding in the region. - E-commerce, fintech, technology, and transport logistics account for half the investments. ### Digital landscape and constraints — supply side - Preconditions for an information and digital economy are lacking in many (non-GCC) MENAP countries: underinvestment in national backbone infrastructures, barriers to entry, limited competition, low broadband penetration, unaffordable and poor quality internet services. - Access to international submarine fiber optic cables is geographically strong, but effective use constrained by lack of competition and open access regulations; some countries restrict access to international gateways and international fixed long-distance in monopolies. - Domestic telecom liberalization improved but restrictions remain; about a third of countries restrict competition in mobile and fixed broadband markets through monopolies, state ownership, or limits on foreign ownership and control. - Internet Exchange Points (IXPs) underdeveloped; local traffic sometimes routed via Europe, increasing latency and cost. - Technology mix in fixed broadband is dominated by DSL; very few countries (UAE, Qatar) deploy fiber optic-based access technologies. - Mobile broadband progress uneven: some countries (Bahrain, Saudi Arabia) launched 5G; several (GCC, Algeria, Jordan, Lebanon) rolled out 4G; most low-income countries still rely on 3G. - Fixed broadband subscriptions are the second lowest in the world after Sub-Saharan Africa (SSA). - Mobile broadband subscriptions in MENAP trail other regions after SSA; within MENAP, subscriptions higher in the GCC and Jordan. - Network quality and reliability remain challenges: - Fixed broadband speeds in MENA are below global averages; most subscriptions are below 10Mbit/s. - GCC, Iran, and Jordan have mobile broadband speeds above global averages in several measures. - Global speed references present in source charts: Global Average = 24.4 and Global average = 52.16. - Entry barriers and high capital requirements slow deployment of advanced network technologies and digital technologies. ### Digital landscape and constraints — demand side - Demand-side constraints are the immediate impediment to SME digitalization: a large digital “usage gap” is several multiples of the “coverage gap.” - MENA has the second highest usage gap globally and the usage gap exceeds the coverage gap, suggesting demand constraints are binding. - Factors constraining SME digital adoption include lack of internal capabilities, knowledge gaps about suitable digital solutions, high cost of broadband relative to incomes, financial constraints, and limited implementation capacity. - Large digital skill gaps across MENAP: - The region rates the second lowest after SSA in basic, standard, and advanced digital skills. - Skill deficiencies reported more acute in cloud, AI, machine learning, mobile technologies, blockchain, data analytics, and advanced security. - Brain drain affects countries with high education (Lebanon, Egypt). - Digital financial services infrastructure underdeveloped for SME transformation: - Point of Sale (POS) terminals penetration limited. - Few countries (Egypt, Jordan, Morocco) have achieved interoperability in mobile payments. - Digital payment instruments (credit and debit cards) limited in most non-GCC countries; debit cards often not accepted in e-commerce transactions. - Fintech activity concentrated in seven countries (UAE, Saudi Arabia, Bahrain, Egypt, Iran, Jordan, Lebanon) and focuses on payments rather than lending. - E-commerce preconditions lacking: unified address systems, postal services, land customs, and last-mile logistics deficiencies; Cash on Delivery (COD) remains prevalent. - Legislative environment: e-transactions and cybercrime laws broadly enacted; less progress on consumer protection and data protection/privacy legislation in several countries. - Consumer readiness uneven: smartphone and internet device ownership concentrated in higher income countries (GCC); in many lower income countries half the population lacks affordable quality internet. - Lack of trust constrains digital payments adoption; consumers distrust websites handling their information and are often unaware of consumer rights. ### Key statistics and exact figures cited - "Only 15-25 percent of SMEs in MENAP had online web presence at the end of 2012" (Deloitte 2014). - E-commerce: "less than 2 percent of total sales" in MENA; "less than 1 percent of the global e-commerce market" (Fabre et al 2019). - "UAE, Saudi Arabia, and Egypt account for 80 percent of the MENA e-commerce market." - Technology startup investment: "annual compound growth rate of 36.6 percent." - UAE: "accounts for 31 percent of all deals and 70 percent of funding in the region." - Platform examples: "Alibaba has 30,000 employees, but provides a platform for more than 10 million ancillary jobs. Uber has a few hundred coders, but it supports the livelihoods of around 1 million on-demand drivers" (World Bank 2016b). - Internet infrastructure and performance chart labels: - Global Average = 76.6 (International Bandwidth Per Internet User context). - Fixed broadband subscription global average = 14 (per 100 inhabitants). - Mobile broadband World Average = 69 (active mobile-broadband subscriptions per 100 inhabitants). - Global average = 24.4 and Global average = 52.16 (Speedtest Global Index labels). - Regulators consider download speeds above 10Mbps as decent broadband speed and 30Mbps as superfast (GSMA 2019). - Affordability thresholds in charts: - Fixed broadband affordability threshold = 5 percent (price as percent of GNI per capita). - Mobile broadband affordability threshold = 2 percent (pre-paid 500 MB as percent of GNI per capita). ### Policy recommendations (selected) - Supply-side and infrastructure: - Remove barriers to entry and competition across the value chain—eliminate monopoly status over the international gateway. - Liberalize the market for building and operating domestic backbone networks. - Encourage open access to networks for fixed international and domestic long distance. - Allow competition in end-user connectivity and support fiber, IXPs, and data center investment. - Demand-side, skills and awareness: - Accelerate educational and labor market reforms to increase digital-skilled staff supply. - Create digital curricula; mandate STEM subjects; provide technical and vocational education and training via public-private partnerships. - Invest in lifelong learning and awareness campaigns, including Arabic content, and provide SMEs with ICT training facilities. - Digital financial services and payments: - Central banks and financial institutions should strive for interoperable retail digital payment systems that are real time, convenient, safe, and ubiquitous. - Improve cross border payment cost, speed and reliability. - Facilitate establishment of P2P and crowdfunding platforms, payment gateways and PoS terminals; adopt regulatory sandboxes with oversight to avoid regulatory arbitrage. - Legal, regulatory and supervisory reforms: - Enact and strengthen e-transactions, consumer protection, data privacy, e-signatures, insolvency, secured transactions laws and enforcement. - Deepen credit registries and bureaus coverage; modernize insolvency regimes; enact secured transactions laws for moveable collateral with electronic registries. - Institutional and business environment: - Address fragmentation and overlapping mandates; establish a formal SME definition consistently applied. - Shift SME support from soft financing to enabling SMEs to qualify for financing by enhancing managerial capabilities. - Institutionalize incubators and programs to assist entrepreneurs and scale-ups. - Data and statistics: - Compile systematic and regular SME data covering number of firms, characteristics by size/gender/age/education, sectoral distribution, contribution to output and employment, entries and exits, gender participation, bank credit to SMEs, and SMEs’ share of NPLs. *Source: wpiea2020135-print-pdf — Selected chapter content from IMF working paper wpiea2020135.* ### 2. Composition of SMEs by Business Sector and Markets .......................................................8 ### 2. Composition of SMEs by Business Sector and Markets ### Table of contents (major themes listed in source) - 2. Composition of SMEs by Business Sector and Markets .......................................................8 - 3. Trends in Startups ..................................................................................................................9 - 4. Factors Impeding SMEs Growth ...........................................................................................9 - 5. SMEs’ Credit Risks..............................................................................................................10 - 6. Initiatives to Enhance SMEs’ access to Finance..................................................................12 - 7. Policy Reforms to Ease the Process of Establishing Businesses .........................................13 - 8. Business Support Programs .................................................................................................14 - 9. Performance of SMEs ..........................................................................................................15 - 10. Factors Underpinning SMEs performance.........................................................................16 - 11. Selected Factors Impeding SMEs’ Access to Bank Finance .............................................17 - 12. Factors Constraining Funding from Non-Bank Financial Institutions ..............................18 - 13. Business Environment for Starting and Operating a Business ..........................................19 - 14. Pillars of a Digital Ecosystem for Enterprises ...................................................................22 - 15. Trends in Internet Adoption and Business Digitalization ..................................................25 - 16. Web Presence and Cloud Adoption by SMEs ...................................................................25 - 17. E-Commerce Trends ..........................................................................................................26 - 18. The Digital Technology Start-up Ecosystem .....................................................................27 - 19. Access to Global Internet Infrastructure ............................................................................28 - 20. Entry barriers to the Telecom market ................................................................................29 - 21. ICT Infrastructures .............................................................................................................30 - 22. Access to Broadband Internet ............................................................................................31 - 23. Internet Speed ....................................................................................................................32 - 24. Broadband Prices ...............................................................................................................33 - 25. ICT Digital Skills ...............................................................................................................34 - 26. Digital Payment Infrastructure and Financial Services .....................................................35 - 27. Factors Constraining E-Commerce Development .............................................................36 - 28. ICT Usage Gap ..................................................................................................................37 - 29. Consumer Readiness ..........................................................................................................38 - 30. Payment Methods...............................................................................................................39 ### Appendices - 1. Digital Technologies and the Potential Benefits they Present .............................................44 *Source: wpiea2020135-print-pdf - 2. Composition of SMEs by Business Sector and Markets .......................................................8 (canonical PDF document listing table of contents).* ### References ............................................................................................................. ### References — IMF Working Paper (wpiea2020135) — Selected Chapter: Introduction & Overview of MENAP SMEs ### Context and Objectives - Development of micro, small and medium-sized enterprises (SMEs) is central to achieving inclusive growth in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region due to high youth unemployment, declining public sector absorption of labor, lower and volatile oil prices, and widening income disparities. - The study addresses four principal questions: - Why did strategies to promote SME development in MENAP have a limited impact on growth and employment creation? - Can digital technologies usher in a new era of resilience, growth and quality employment generation among SMEs? - How digitalized are MENAP SMEs and what constraints do they face in digitalizing their businesses? - What policy mix can enable SMEs to leverage digital technologies to boost growth and achieve inclusive growth, and what role should the government play? - Geographic coverage: review covers 21 of the 24 MENAP countries; the three not covered are Syria, Libya and West Bank and Gaza (WBG). - Definition: Digitalization defined as “the use of data, digital technologies and interconnections to create business or change existing activities.” ### Structure, Performance and Sectoral Composition of MENAP SMEs - SMEs account for over 90 percent of total businesses on average in MENAP. - SME employment share ranges from the low teens in Algeria to more than 50 percent in several countries (Bahrain, UAE, Iran, Jordan, Lebanon, Egypt, Pakistan, Tunisia). - SME contributions to GDP range from a low of 10 percent in Qatar to more than 70 percent in some oil-importing countries (Egypt, Tunisia, Yemen). - SMEs are heterogeneous; most are concentrated in services such as trade, retail distribution, and simple contracting—activities characterized as low entry cost, low value-adding and low paying. - Participation in global value chains (GVC) is still very low. ### Startup Trends and Geographic Concentration - Investments in startups increased at a compound annual growth rate of 22.5 percent between 2015 and 2019. - The number of startups worth over US$100 million increased between 2015 and 2019 (Magnit 2019). - Startup activity is geographically concentrated: eight countries (Bahrain, Egypt, Jordan, Lebanon, Oman, Saudi Arabia, Tunisia, and UAE) account for over 85 percent of all startups; the UAE alone accounts for a third of the activities. - Despite rapid startup growth, magnitudes of employment creation have not been sufficient to significantly reduce youth unemployment. ### Key Constraints Impeding SME Growth - Principal constraints: limited access to finance, unfavorable business environments, and talent gaps (including weak managerial capacities). - Country-specific constraints include corruption, unreliable electricity, high tax rates, competition from imports, lack of access to public procurement, high interest rates, political instability, and informality. - Factors impeding SME access to finance: - Structural: limited coverage of credit registries and bureaus, weak insolvency regimes, underdeveloped private equity markets. - Policy: restrictive regulations limiting NBFIs and capital markets, excessive government borrowing crowding out private sector. - Bank-side: inadequacies in risk management and slow development of suitable lending products. - SME-side: weaknesses in management skills, lack of collateral, and lack of financial accounts. - SMEs exhibit greater susceptibility to economic shocks due to limited capital buffers, weak governance, and limited digital capabilities. ### Credit Risk and Non-Performing Loans (NPLs) - Cross-country data show a positive correlation, albeit moderate, between the level of the NPL ratio and the exposure of the banking system to SMEs. - Non-performing loan (NPL) ratios for SMEs are often much higher than average NPL ratios for overall banking systems. - Nonbank financial institutions (NBFIs) with comparatively large exposures to SMEs exhibit higher levels of NPLs than banks do. ### Policy Measures Implemented to Support SMEs - Most prevalent financial-sector measures: credit guarantee schemes and establishment of credit registries/bureaus—over 80 percent of countries established credit guarantee schemes; over 80 percent established credit registries and/or bureaus (Figure 6 indicators). - Selected policy uptake indicators (as presented in Figure 6 table): - Credit guarantee schemes: 84 (No. of Countries / Percentage share shown in table) - Credit registry: 58 - Credit rating: 16 - Credit guarantee: 95 - Modernize insolvency regime: 42 - Establish collateral registry / law for movable collateral: 21 - Specify percentage of bank lending to SMEs: 32 - Micro Finance Institutions (for-profit introduced): 42 (No. and 47/37/16/16 etc appear in table context) - SME Stock Market / Alternative equity listings, Crowdfunding (Equity), Crowdfunding (Loan Based), P2P, Public venture capital funds, Islamic Financial Products, Subsidized lending, Interest rate caps listed across countries with varied counts and percentage shares as per Figure 6. - Other reforms to broaden funding: regulations to establish micro-finance sectors (at least nine countries), alternative equity listings for SMEs on stock markets (seven countries), SME-focused funds and venture capital/private equity regulation in some countries, and crowdfunding regulation in three countries. - Policy measures to promote SME credit demand: a few countries capped maximum interest rates on SME loans (e.g., Central Bank of Egypt capped rates ranging from 5 percent for small businesses to 12 percent for working capital for mid-sized firms); some countries provided subsidized interest rates through specialized credit institutions. - All countries created an enabling environment for Islamic banks, which has positive spillovers for SME financing. ### Business Registration, Institutional Support and Public Procurement - Many countries introduced one-stop shops, online registration platforms, and eliminated or reduced minimum paid-in capital requirements to facilitate business entry (Figure 7). - Countries implementing online business registration, one-stop shops, and paid-in capital elimination include (examples listed in source): Djibouti, Egypt, Jordan, Kuwait, Mauritania, Afghanistan, Algeria, Bahrain, Morocco, Oman, Pakistan, Saudi Arabia, Tunisia, UAE, Yemen. - Institutional support: formal SME strategies, public and semi-public SME promotion institutions, incubators/accelerators, mandates for specified shares of public procurement to be allocated to SMEs in several countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Egypt, Jordan, Lebanon). - International collaboration: World Bank, European Investment Bank, and MENA-OECD competitiveness program provided policy advice, lending, technical assistance, and capacity building. ### Evaluation of Effectiveness and Remaining Gaps - Systematic evaluations are lacking; policies had positive impacts but fell short of objectives. - Persistent barriers: access to finance, talent gaps, weak managerial capacities, dominance of microenterprises, high SME funding gaps relative to other regions. - Microenterprises predominate the SME universe, generate limited employment opportunities, are low paying and low value-adding, and are not well suited to conventional bank lending. - Partial implementation and design frictions: credit registries and bureaus coverage remain low; insolvency regimes have low recovery rates and lengthy resolution times; accounting and auditing sector reforms were limited; few countries enacted secured transactions laws or established collateral registries. ### Non-Bank Funding Constraints - Nonbank funding sources remain scant due to strategic tensions and lack of enabling regulation. - Stock markets are more suited to medium-large firms, not microenterprises. - Family funding is common in some GCC countries; general preference for ownership reduces willingness to give up equity. - Private equity has increased but remains concentrated on early-stage funding and geographically concentrated; capital for growth stage is scarce. - Microfinance and leasing (including Ijara) have limited penetration: MENA microfinance market size and penetration remain among the lowest globally; Ijara prevalence limited to a few countries. - Key structural indicators from figures: - Credit registries and bureaus coverage remains low across many MENAP countries (percent of population covered shown in figures). - Bank credit to SMEs has increased modestly between 2010 and 2018 in many countries but remains a small share of total bank loans in several economies. - Time to resolve insolvency in many MENAP countries reduced but remains high in some (MENA = 2.8 years cited for 2010 baseline in figure context). - Recovery rate in insolvency remains low in MENA (MENA = 26.3 cents on the dollar; OECD = 70.5 referenced in figure context). ### Observations on Digitalization Imperative - The COVID-19 “great lockdown” revealed SMEs’ vulnerability due to lack of digitalization and inability to operate remotely; digitalization placed at center of recommended rethinking of SME development strategies. - Empirical studies cited indicate technology enhances efficiencies, innovation, access to international markets and productivity (Accenture 2016, OECD 2017, WTO 2019). - Digital technologies can improve SMEs’ access to finance, government efficiencies, and women’s labor force integration, and can facilitate business continuity and resilience to shocks. *Source: IMF working paper — wpiea2020135 (Selected chapter content provided).* ### 1. Murabahah is debt ### 1. Murabahah is debt ### Key characterization - Murabahah is debt-like financing structured as sales. - This could be sales with mark up and deferred payments. *Source: wpiea2020135-print-pdf - 1. Murabahah is debt; https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020135-print-pdf.pdf* ### 2. Ijara is lease with different options to buy ### 2. Ijara is lease with different options to buy ### Institutional and business environment for SMEs - Institutional frameworks for supporting SMEs are fragmented; multiple agencies and programs create duplication and coordination challenges. - Policies have not been differentiated according to the scale and characteristics of SMEs. - Structural and demographic statistics on entry, exit, growth, and job creation for SMEs are lacking across the region. - Most SMEs in MENAP countries are informal and not registered; most countries do not conduct systematic enterprise surveys. - Business support services have focused more on technology startups than the broader SME sector; many accelerators, incubators, techno parks, and clusters are concentrated in capital cities rather than rural areas. - Government dominance in several MENAP countries (GCC, Algeria, Iraq, Lebanon, Tunisia) creates challenges: governments act as employer, consumer, producer, and financial service provider. - High public sector salaries in most of the GCC make it difficult for SMEs to compete for talent (WAMDA 2016). - Funding of large fiscal deficits from domestic banking systems (Egypt, Yemen, Lebanon, Algeria) constrains credit supply to SMEs. - Macro and regulatory policies have unintended adverse effects on SMEs: government-enforced interest rate caps constrain banks’ ability to price risks; AML/CFT pressures have led to de-risking and reduced bank exposures to SMEs in some countries. - Inadequate investments in infrastructure, restrictive regulatory frameworks, unreliable electricity (Afghanistan, Djibouti, Mauritania), and geo-political tensions (Iraq, Yemen) erode effectiveness of incentives and hamper SME growth and regional expansion. ### Digitalization of SMEs — overview and ecosystem pillars - Digitalization defined as the use of data, digital technologies, and interconnections that results in new or changes to existing activities (OECD 2019a). - Key technologies: Big data, Internet of Things (IoT), Artificial Intelligence (AI), machine learning (ML), distributed ledger technology (block chain), cloud computing. - Broadband internet is a critical input and foundation for digital services, applications, and business models; broadband networks require international, domestic backbone and backhaul, and local access connectivity. - Pillars of a digital ecosystem for enterprises include: - Infrastructure for Digital Connectivity: international connectivity, national backhaul, last mile access, Internet Exchange Points, fixed and mobile broadband, data centers, devices, software and API. - Digital Skills: basic, intermediate, advanced. - Digital Platforms: public (E-government: P2G, G2P, B2G) and private (E-commerce, social networks, P2P, crowdfunding). - Digital Financial Services: banking, payments and remittances, capital raising and credits; digital payment infrastructure. - Entrepreneurial Culture: willingness to take risk, digitally enabled businesses, venture capital, private equity. - Cross-cutting foundations and regulations: cyber security, data protection and privacy, AML/CFT, data governance, consumer protection, intellectual property rights, competition policy, unbiased AI regulation, regulatory sandboxes, spectrum policies; demand creators (consumer readiness); reliable electricity; e-commerce logistics; digital identification. ### Opportunities and benefits of digitalization for MENAP SMEs - Digitalization can boost SME growth, resilience to shocks, quality employment creation, reduction in poverty and income/gender inequalities, and inclusive growth — contingent on mitigating risks. - Digital solutions can accelerate SME migration from microenterprises to larger firms, enhancing resilience and employment creation. - Broadband internet enables reaching new clients and markets at low cost and business continuity during lockdowns. - IoT and GPS Apps can improve stock management, transportation, and ease logistical challenges for e-commerce. - Cloud-based services reduce ICT upfront capital expenditures, provide ICT expertise, improve digital security, and lower communication costs. - Big data analytics can improve customer service and credit risk assessment, improve AML/CFT compliance, and enable products tailored to SMEs. - Blockchain facilitates faster cross border payments and reliable electronic registries of leased and moveable assets to enable pledging of moveable collateral. - Digital innovations (crowdfunding, P2P) help provide alternative funding sources. - E-government can reduce costs and improve outcomes; digital payments by governments can incentivize mass adoption of digital payments. - Illustrative network effects from technology platforms: Alibaba has 30,000 employees and provides a platform for more than 10 million ancillary jobs; Uber has a few hundred coders but supports around 1 million on-demand drivers (World Bank 2016b). ### Risks and challenges from digitalization - Data becomes an asset that raises challenges around privacy, intellectual property, and security. - Increased connectivity broadens the threat landscape: cybercrime, digital fraud, money laundering, biased AI decisions, fake news and deep fakes. - SMEs lack in-house IT expertise to monitor and secure networks and devices. - Without retooling programs, automation can displace labor and increase unemployment. - Digital dividends can be neutralized if risks are not well managed (IMF 2019). ### Trends in SME digital transformation and uptake - Businesses in MENAP have generally been slow to adopt the internet to boost productivity; consumers moved online earlier than businesses. - Mass internet adoption took off around the mid-2000s in the GCC, but businesses began to digitalize mainly after 2010. - SMEs’ online presence and cloud adoption remain low: - Only 15-25 percent of SMEs in MENAP had online web presence at the end of 2012 (Deloitte 2014); recent surveys indicate shares have only marginally changed (WTO 2019). - Deployment of cloud services by SMEs remains low despite data centers cropping up. - E-commerce remains generally small: - E-commerce transactions for the MENA region account for less than 2 percent of total sales and less than 1 percent of the global e-commerce market (Fabre et al 2019). - UAE, Saudi Arabia, and Egypt account for 80 percent of the MENA e-commerce market. - MENA E-Commerce Market (US$ billion): 2014–2017 trend shows CAGR 25% (figure labels include 4.2, 5.3, 6.7, 8.3 with country CAGR annotations 30%, 13%, 27%, 8.3, etc. as presented in source charts). - Technology startups investment grew at an annual compound growth rate of 36.6 percent. - UAE accounts for 31 percent of all deals and 70 percent of funding in the region. - E-commerce, fintech, technology, and transport logistics account for half the investments. ### Digital landscape and constraints for SME digitalization — supply side - Preconditions for an information and digital economy are lacking in many (non-GCC) MENAP countries: underinvestment in national backbone infrastructures, barriers to entry, limited competition, low broadband penetration, unaffordable and poor quality internet services. - Access to international submarine fiber optic cables is geographically strong, but effective use constrained by lack of competition and open access regulations; some countries restrict access to international gateways and international fixed long-distance in monopolies. - Entry barriers lead to underutilization of international bandwidth and higher international charges, which spill over to domestic markets, increasing costs and latency. - Domestic telecom liberalization improved but restrictions remain; about a third of countries restrict competition in mobile and fixed broadband markets through monopolies, state ownership, or limits on foreign ownership and control. - Internet Exchange Points (IXPs) underdeveloped due to constraints on peering and network development; local traffic sometimes routed via Europe, increasing latency and cost. - Technology mix in fixed broadband is dominated by DSL; very few countries (UAE, Qatar) deploy fiber optic-based access technologies. - Mobile broadband progress uneven: some countries (Bahrain, Saudi Arabia) launched 5G; several (GCC, Algeria, Jordan, Lebanon) rolled out 4G; most low-income countries still rely on 3G. - Fixed broadband subscriptions are the second lowest in the world after Sub-Saharan Africa (SSA). - Mobile broadband subscriptions in MENAP trail other regions after SSA; within MENAP, subscriptions higher in the GCC and Jordan. - Network quality and reliability remain challenges, especially in lower income countries: - Fixed broadband speeds in MENA are below global averages; most subscriptions are below 10Mbit/s. - Mobile broadband speeds: GCC, Iran, and Jordan have speeds above global averages in several measures. - Global speed references in figures: Global average = 24.4 (mobile fixed?), Global average = 52.16 (mobile?) as labeled in charts. - High cost of internet hampers digital transformation; average broadband package costs declining but unaffordable in several low-income countries; constrained access to international gateways and absence of IXPs contribute to higher costs. - Entry barriers and high capital requirements slow deployment of advanced network technologies and digital technologies. ### Digital landscape and constraints for SME digitalization — demand side - Demand-side constraints are the immediate impediment to SME digitalization: a large digital “usage gap” is several multiples of the “coverage gap.” - MENA has the second highest usage gap globally and the usage gap exceeds the coverage gap, suggesting demand constraints are binding. - Factors constraining SME digital adoption include lack of internal capabilities, knowledge gaps about suitable digital solutions, high cost of broadband relative to incomes, financial constraints, and limited implementation capacity. - Large digital skill gaps across MENAP: - The region rates the second lowest after SSA in basic, standard, and advanced digital skills. - Skill deficiencies reported more acute in cloud, AI, machine learning, mobile technologies, blockchain, data analytics, and advanced security. - Brain drain affects countries with high education (Lebanon, Egypt). - Digital financial services infrastructure underdeveloped for SME transformation: - Point of Sale (POS) terminals penetration limited. - Few countries (Egypt, Jordan, Morocco) have achieved interoperability in mobile payments. - Digital payment instruments (credit and debit cards) limited in most non-GCC countries; debit cards often not accepted in e-commerce transactions. - Fintech activity concentrated in seven countries (UAE, Saudi Arabia, Bahrain, Egypt, Iran, Jordan, Lebanon) and focuses on payments rather than lending; many mobile wallets offer basic person-to-person transfers but not online payments. - E-commerce preconditions lacking: unified address systems, postal services, land customs, and last-mile logistics exhibit deficiencies that hamper delivery speed, increase failed deliveries, and raise costs; Cash on Delivery (COD) remains prevalent. - Legislative environment: e-transactions and cybercrime laws broadly enacted; less progress on consumer protection and data protection/privacy legislation in several countries. - Consumer readiness uneven: smartphone and internet device ownership concentrated in higher income countries (GCC); in many lower income countries half the population lacks affordable quality internet. - Lack of trust constrains digital payments adoption; consumers distrust websites handling their information and are often unaware of consumer rights. ### Key statistics and exact figures cited in source - SMEs with online web presence at end of 2012: "Only 15-25 percent of SMEs in MENAP had online web presence at the end of 2012" (Deloitte 2014). - E-commerce: "less than 2 percent of total sales" in MENA; "less than 1 percent of the global e-commerce market" (Fabre et al 2019). - Market concentration: "UAE, Saudi Arabia, and Egypt account for 80 percent of the MENA e-commerce market." - Technology startup investment: "annual compound growth rate of 36.6 percent." - UAE: "accounts for 31 percent of all deals and 70 percent of funding in the region." - Examples of platform network effects: "Alibaba has 30,000 employees, but provides a platform for more than 10 million ancillary jobs. Uber has a few hundred coders, but it supports the livelihoods of around 1 million on-demand drivers" (World Bank 2016b). - Internet infrastructure and performance figures present in charts and labels include: - Global Average = 76.6 (International Bandwidth Per Internet User context). - Fixed broadband subscription global average = 14 (per 100 inhabitants). - Mobile broadband World Average = 69 (active mobile-broadband subscriptions per 100 inhabitants). - Global average = 24.4 and Global average = 52.16 (Speedtest Global Index labels for fixed and mobile broadband speeds as depicted). - Fixed broadband subscription speed tiers: reference that subscriptions are mostly at speeds below 10Mbit/s; regulators consider download speeds above 10Mbps as decent broadband speed and 30Mbps as superfast (GSMA 2019). - Affordability thresholds in charts: - Fixed broadband affordability threshold = 5 percent (price as percent of GNI per capita). - Mobile broadband affordability threshold = 2 percent (pre-paid 500 MB as percent of GNI per capita). *Source: IMF working paper section "2. Ijara is lease with different options to buy" (wpiea2020135-print-pdf).* ### 2017. The Mobile Economy Middle East and North Africa ### 2017. The Mobile Economy Middle East and North Africa ### Summary findings on digitalization and SMEs in MENAP - Policies to promote SME growth and employment have not had the envisioned success; a fundamental re-thinking of the strategy for developing SMEs is needed. - Partial implementation of reforms and idiosyncratic factors contributed to underperformance; frictions in SME policy design also played important roles. - In a rapidly digitalizing global economy, the growing digital divide will increase inequalities; firms without a digital presence can become marginalized. - Digital technologies can be a game changer for business growth and resilience, but technology alone will not produce broadly shared prosperity. - Transformational visions that move from e-government-focused initiatives to full digital economy development are required. - A well-articulated strategy addressing supply and demand constraints to digital adoption, complemented by sustained implementation of financial sector and business support reforms, is key to success. ### Digital ecosystem gaps and infrastructure priorities - Digital ecosystems have developed unevenly across the MENAP region; priorities differ by country. - GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) has high connectivity and broadband penetration but needs to: - Strengthen other elements of the digital ecosystem for SMEs. - Develop frameworks for adoption of cloud technologies and services. - Invest further in fiber networks, cloud computing, IXPs, and data centers. - Improve spectrum allocation and increase competition. - For most other countries, connectivity infrastructure remains inadequate; access and usage of broadband internet remain a challenge for large population segments. - Priority infrastructure measures for non-GCC countries include: - Removing barriers to entry and competition across the value chain—eliminating monopoly status over the international gateway. - Liberalizing the market for building and operating domestic backbone networks. - Encouraging open access to networks for fixed international and domestic long distance. - Allowing competition in end-user connectivity. - Initiatives to decrease costs to create a favorable investment climate and boost infrastructure rollout. - Other infrastructure gaps needing attention: - Logistics (inadequate warehouse coverage, scarcity of regional distribution centers, weaknesses in postal services, lack of postal codes). - Limitations in land and customs clearance. - Reliable electricity supply is essential for internet access. ### Digital demand-side constraints and skills - Large internet “usage gap” indicates demand constraints are binding; policies are needed to promote SMEs’ uptake of digital solutions. - Digital skill gaps require accelerated educational and labor market reforms aligned with industry needs: - Increase supply of digital-skilled staff for business needs and labor force participation in the digital economy. - Create digital curricula and seamless learning pathways from primary schools to higher education and employment. - Mandate STEM subjects in school curriculums and provide technical and vocational education and training through public-private partnerships. - Invest in lifelong learning opportunities. - Ease labor restrictions to facilitate expatriates in highly technical areas as a short-term measure. - Awareness and affordability measures: - Awareness campaigns on benefits of digital technologies and promoting relevant content, including in Arabic. - Provide SMEs with ICT training facilities and digital literacy programs for consumers to avoid fraud and costly mistakes. - Address affordability of ICT services by encouraging competition and reviewing ICT taxation on device affordability. - Trust is fundamental; coherent strategies for digital security, privacy, and online consumer protection are critical. ### Digital financial services (DFS) and payments: recommended policies - DFS are essential for digitalization and require policies that promote innovation while mitigating risks. - Banks need expertise to assess digital projects; governments should address regulatory constraints and invest in payment infrastructures. - Specific recommendations: - Central banks, in collaboration with financial institutions, should strive for retail digital payment systems that are interoperable and facilitate real time, convenient, safe, and ubiquitous payment services. - Improve cost, speed and reliability of cross border payments to remove frictions preventing SMEs from reaching customers beyond their borders. - Regulations should facilitate establishment of P2P and crowdfunding platforms, payment gateways, and Points of Sale (PoS) terminals. - Regulators should step up oversight of DFS to monitor and ensure safety, efficiency, and reliability, and engage telecom regulators to enhance operational reliability of DFS. - Collaboration with telecom regulators can enhance operational reliability of DFS, particularly in remote and rural areas to maintain agent and customer confidence. - Regulatory sandboxes can enhance supervisory communications with market participants, accelerate digital transformation of traditional entities, and improve supervisors’ knowledge of technologies and market development; risks include ensuring an even playing field to avoid regulatory arbitrage (Wilson 2019). ### Legal, regulatory and supervisory reforms - Investments in ICT and payment infrastructure should be complemented with regulations for: - E-transactions, consumer protection, and data privacy to balance firms’ need to use data with security and privacy concerns. - E-signatures and e-contract laws. - Electronic signature laws, contract enforcement, insolvency, intellectual property laws, KYC requirements, and cross-border remittances. - Regulatory and supervisory frameworks should be reviewed to allow appropriate and safe use of innovative technologies. ### Rural-urban digital divide and national strategies - The rural-urban digital divide threatens to widen income inequalities and undermine inclusive growth. - National digital strategies should include clear targets to achieve universal affordable high-speed internet and policies addressing commercial viability of rural telecom infrastructure rollout. ### Financial sector and business environment reforms for SME digital benefits - Five reform areas warrant attention: - Deepening financial sectors. - Ensuring coherence in policy mix. - Improving the business environment. - Strengthening the institutional support framework. - Developing SME statistics. - Financial sector priorities: - Strengthen financial infrastructures, non-bank financial segments, and capital markets. - Deepen and broaden coverage of credit registries and bureaus to include SMEs. - Modernize insolvency regimes to avoid criminalizing bankruptcy, reduce time for resolution, and improve recovery rates. - Enact secured transactions laws for moveable collateral to allow a broader range of collateral with clear priority rankings supported by electronic registries. - Ensure effective enforcement of collateral in default cases. - Improve regulatory frameworks for microfinance, factoring, leasing, corporate bond markets, private equity, and venture capital. - Ensure comparable supervisory approaches across financial institutions on a proportional basis, including access to infrastructure like credit registries and credit bureaus. - Macro and regulatory policy calibration: - Interest rate caps can discourage bank lending to SMEs by limiting ability to price risk; relaxation of interest rate caps is recommended. - Policies to promote bank lending to SMEs should balance financial inclusion with financial stability. - Review public sector wages for competitiveness; government borrowing should account for risks of crowding out the private sector, especially SMEs. - Institutional support framework: - Address fragmentation and overlapping mandates; improve coordination and establish a formal SME definition consistently applied. - Shift SME support from soft financing toward enabling SMEs to qualify for financing by enhancing managerial capabilities. - Institutionalize business incubators and programs to assist entrepreneurs and raise patentable innovation. - Conduct regulatory impact studies regularly and provide special incentives to SME scale ups or “gazelles” with potential to create quality jobs. - Data and statistics: - Compile systematic and regular SME data covering number of firms, characteristics by size/gender/age/education, sectoral distribution, contribution to output and employment, entries and exits, gender participation, bank credit to SMEs, and SMEs’ share of NPLs. ### Appendix: Digital technologies and benefits for SMEs (selected items) - Cloud Computing - Description: Delivery of computing services like servers, storages and more over the internet; services include IaaS, PaaS, SaaS. - Benefits for SMEs: - Most SMEs opt for SaaS or IT services from niche providers to reduce digitalization costs, partly address knowledge gaps, and ensure cost-effective security. - Reduces upfront ICT infrastructure costs; software easier to install, maintain and update. - Resources can be used and priced in a scalable and adaptable manner; reduces piracy risk. - Big Data Analytics - Description: Analysis of data characterised by high volume, velocity and variety from sources like market transactions, sensors, or social media. - Benefits for SMEs: - Effective use of data for business decisions; gives SMEs competitive advantage and ability to compete with larger firms. - Reduced costs and increased productivity; enhanced marketing design; ability to foresee and identify trends. - Artificial Intelligence (AI) - Description: Ability of machines and systems to acquire and apply knowledge, including sensing, language processing, pattern recognition, learning, and making decisions and predictions; Machine Learning is key. - Benefits for SMEs: - Fewer employee expenses as robots can execute repetitive tasks; greater efficiency; reduced errors in collecting and analyzing vast data. - Blockchain - Description: Ledger maintained and stored across a network of computers that updates regularly so copies are identical; enables authentication of ownership and secure transactions. - Benefits for SMEs: - Provides full transparency for buyers and sellers regarding original source of information. - Smaller businesses can obtain trusted information at lower cost; has been applied in real estate to provide reliable collateral registries. - Internet of Things (IoT) - Description: New business models and services based on data collected from devices and objects (e.g., GPS in phones to track location). - Benefits for SMEs: - Better interaction with clients; improved efficiency and reduced operational costs. - In retail: allows SMEs to provide tailored products. - In production: anticipate stock replacement. - In logistics: calculate better delivery routes and improve customer experience. *Source: IMF PDF content unit "wpiea2020135-print-pdf - 2017. The Mobile Economy Middle East and North Africa"* --- _Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020135-print-pdf.pdf_