Banks need to expand lending to small businesses across the Arab world to create jobs, especially in countries afflicted by unrest, say the heads of the World Bank and the Arab Monetary Fund.
Too much credit was going to a select few big borrowers at the expense of small firms, said Dr Farrukh Iqbal, the World Bank's director of the strategic co-operation department for the Middle East and North Africa (Mena) region. "A future priority for the region should be to develop more adequate access to finance for SMEs [small to medium enterprises]," he said yesterday in Abu Dhabi.
"At present only 8 per cent on average of bank lending goes to SMEs, this is a very low ratio by international standards."
Discontent at a lack of jobs was one of the contributors to the unrest fanning out across parts of the Mena region this year.
Unemployment runs as high as 25 per cent among youths in the Arab world, according to the Institute of International Finance.
Considered the engines of growth in many economies, small companies also play a vital role in creating jobs when they have sufficient capital to expand, analysts say.
Surveys from the World Bank, however, show access to finance in Mena is more constrained than in other emerging regions, with only one in five SMEs having a loan or line of credit. Evidence suggests banks feel more confident about lending to bigger companies that they consider less of a credit risk.
"Excessive credit concentration means there's a risk to both the stability and financial stability objectives of the financial system," said Dr Iqbal, during a workshop on financial regulations organised by the World Bank and the Arab Monetary Fund (AMF). "If you have excessive concentration, it means the system is potentially hostage to large borrowers so those borrowers have very few incentives to go outside the financial system. This diminishes the prospects for capital market development."
Developing local capital markets has been highlighted as a priority by many regional governments for helping to boost investment in the economy.
"Lending to SMEs is a very big issue as it relates to the issue of creating jobs, which is important for the Arab world," said Jassim al Mannai, the director general of the AMF. "As soon as we are in a position to develop further the position of the SMEs we will be able to create jobs."
The World Bank, the AMF and other multilateral organisations are helping to fill the breach created by the SME-funding vacuum.
The Arab agency and the International Finance Corporation, a financing arm of the World Bank, launched a scheme in April to enable companies to use movable assets such as equipment, inventory and accounts receivable as collateral to obtain credit.
The two organisations are also providing technical assistance to economies in setting up credit bureaus, which can provide a clearer picture of the credit risk of borrowing firms. A lack of information about the financial health of borrowers has been cited as a reason for dissuading some banks from lending to SMEs.
As much as US$2 billion (Dh7.34bn) is being made available to SME initiatives through the Arab Development Fund, created last year by Arab finance ministers.
