Insurance and reinsurance companies are well positioned to help bridge the $123 billion financing gap in the Arab world’s small and medium enterprises, a sector long hailed as the backbone of an economy and the funding of which can also be promoted as an asset class.
SMEs find it difficult to secure financing from traditional banks because the latter has difficulties understanding the risks and how to assess these. Insurers are better off to address this, as they are not bound by certain regulatory requirements that make banks hesitant, according to Olivier Placca, co-founder of French credit insurance platform Tinubu Square.
“Banks have regulatory constraints – Basel Framework rules, for instance – preventing them from mobilising the capacity that is required in the SME market. The capacity of insurers and reinsurers is at the highest; a good thing to do is to transfer part of this risk from lenders to insurers,” Mr Placca said at the FinTech Abu Dhabi conference on Wednesday.
“If an SME asks for financing, if they or the bank has a credit insurance policy, they can use that as a collateral for financing. This gives banks the benefit of indemnity and mobilise capacity at a lower cost for SMEs.”
Globally, SMEs play a big role in economies. In the Arab world alone, SMEs make up 97 per cent of businesses, employing half of the workforce – totalling about 150 million people – and accounting for about 40 per cent of gross domestic product, according to figures cited by Nadine Chehade, senior financial sector specialist at the World Bank.
“SMEs are an engine of the economy of the future because they are the creators of the millions of jobs that are needed every year on the market,” she said.
A pre-Covid-19 report from the International Monetary Fund said increasing SMEs’ access to finance in the Mena region to the average level of emerging and developing economies would raise annual growth by up to 1 per cent and could create up to eight million jobs in the Arab world by 2025.
But the pandemic exposed another vulnerability of the sector. Policy rate cuts, liquidity support and loan guarantee programmes helped reduced borrowing costs to ease the burden of companies during the crisis; SMEs in the region had relatively limited access, with only 33 per cent receiving at least one type of policy support compared with 48 per cent for large firms, the IMF said in a recent study.
“There’s a lot of perceived high risks coming from SMEs. For example, information asymmetry: it is extremely difficult for anybody wanting to finance an SME to have proper data to do a good underwriting,” Ms Chehade said.
Technology can also help address the gap, with a “small number” of FinTech firms trying to tap into the “immense” market opportunity, she said.
Andre Casterman, founder of Casterman Advisory and chairman of the International Trade and Forfaiting Association’s FinTech committee, argued that SME financing and trade can be advertised as an asset class to institutional investors – entities that raise funds on behalf of its members – including hedge funds, mutual funds and endowments.
“If we rely on balance sheet capacity as offered by banks, this won’t be enough, because oftentimes the risk appetite and fund capacity is not there,” he said.
“We need to get liquidity from non-banking institutions – family offices, pension funds and corporate treasuries – that recognise that trade finance represents real economy.”
Credit bureaus – entities that collect information relating to the credit ratings of individuals and makes it available to financial institutions – can also play a key role in helping SMEs secure funding.
“If we continue to work only with banks, that’s not sufficient; that's the importance of having credit bureaus,” Mr Casterman said.
Despite the pandemic, the UAE’s Etihad Credit Insurance was able to secure approximately Dh2.1 billion ($572 million) worth of non-oil trade from SMEs as of October, according to chief executive Massimo Falcioni.
“What set the UAE apart was its readiness and the foundations put in place years prior to the pandemic, specifically in the digital sector. Years of planning and implementing digitisation systems across both government and private entities made it easier for companies to shift,” he said.