SME Development and Financial Inclusion in the Arab World

IMF News, February 10, 2019

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Speech by Christine Lagarde, Managing Director, IMF, at World Government Summit, Dubai, February 10, 2019.
Welcomes participants and frames SME development and financial inclusion as central to making growth more inclusive in the Arab region.
Notes intent to: (i) explain “why” focus on SME financial inclusion; (ii) explain “how” countries can create an enabling environment for SMEs; and (iii) explain “how” the Fund can support members on these efforts.

Macro-relevance: SMEs help create jobs, diversify economies, and support growth.
Key regional facts:
- SMEs represent 96 percent of registered companies.
- SMEs employ half of the labor force.
- Lending to SMEs in the region is only 7 percent of total bank lending.
Projected benefits of closing the financial inclusion gap (with respect to the average of emerging and developing countries):
- It could boost annual economic growth by up to one percent.
- Potentially leading to about 15 million new jobs by 2025 in the Arab region.
- It could increase the effectiveness of fiscal and monetary policies by improving domestic revenue mobilization and monetary policy transmission.

Principle: promoting SME financial inclusion requires a holistic approach; there is no magic bullet and partial approaches are unlikely to suffice.
Three common determinants to scale up SME bank credit:

1. Sound economic fundamentals and financial sectors

Curb the size of the state where it crowds out financing for SMEs and creates an uneven playing field with SOEs.
Ensure a sound and competitive economy and banking sector that facilitate market entry for SMEs.

2. Institutional factors

Good governance and financial supervisory capacity.
Availability of credit information.
Strong legal frameworks.
Example: increasing the coverage of credit bureaus in the Arab region could raise employment, especially by SMEs.

3. Harnessing alternative channels of SME finance

Tap capital markets and support development of SME capital market segments.
Fintech as a potential game changer: can increase competition among credit providers and expand credit information.

IMF role:
- Provide more granular and tailored advice reflecting international experience and specific country needs.
- Coordinate support with other regional and international organizations.
Observed country action:
- Several Arab countries, such as Egypt, Jordan, and the U.A.E., have started to implement comprehensive strategies to increase financial inclusion, including for SMEs.
Ongoing work:
- A new IMF paper on SME financial inclusion will be launched on Tuesday in Cairo; intended to mark the start of deeper engagement with members in this policy area.

SMEs represent 96 percent of registered companies.
SMEs employ half of the labor force.
Lending to SMEs in the region is only 7 percent of total bank lending.
Closing the financial inclusion gap could boost annual economic growth by up to one percent.
Closing the gap could potentially lead to about 15 million new jobs by 2025.

For governments and regulators:
- Reduce state crowding-out where SOEs distort competition for SME finance.
- Strengthen governance and financial supervisory capacity.
- Expand coverage and effectiveness of credit information systems and credit bureaus.
- Strengthen legal frameworks that support lending and creditor rights.
For financial sector and markets:
- Promote a competitive banking sector that facilitates SME market entry.
- Develop SME segments in capital markets to diversify funding sources.
- Encourage fintech adoption to increase competition among credit providers and expand credit information.
For the IMF and international partners:
- Provide tailored, country-specific advice on SME financial inclusion.
- Coordinate technical and policy support with regional and international organizations.

Italic: Content based on speech text provided by the IMF.