MSME in Selected MENA Countries: Challenges and Way Forward 12th September-FINALUpdated 16th... ·...
Transcript of MSME in Selected MENA Countries: Challenges and Way Forward 12th September-FINALUpdated 16th... ·...
Research & Statistics Department
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MSME in Selected MENA Countries:Challenges and Way Forward
Cairo, September 20th, 2018
Dr. Magda Kandil
A presentation to "MSMEs: Inspiring Growth Challenges & Opportunities in Access to Finance” conference.
Remaining Gaps and challenges
Rationale for Government Intervention
SME development in Morocco, Jordan and Egypt
TABLE OF CONTENTS
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SMEs: Job Creation and Inclusive Growth
SME Action Plan in the UAE 5
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SMEs Common Definitions
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0 20 40 60 80 100 120
Assets
Turnover
Assets & Turnover
Others
Employees & Assets
Employees & Turnover
Employees, Turnover & Assets
Employees
Common Combination of MSME definition:
Using Definitions across 155 economies; Employees are the most common
variable used in defining MSMEs.
Source: IFC, 2014. MSME Country Indicators
Main variables used in defining MSMEs
No. MSME definitions
SMEs contribute to job creation & inclusive growth, Achieving economic and social priorities
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OECD SMEs contribution to the economy: 70% of job creation: When informal sector is taken into account: SME contribute to more than 70%
of total employment. SMEs allow low qualified workers to improve their skills. 50% to 60% of value added: Important channel for boosting economic growth. Help achieving poverty reduction & social inclusion objectives. SMEs account for over 95 per cent of enterprises in OECD countries: 25% in the category of “self-employed with employees” are women in the EU.
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Country group OECD MENA
Total No. of Companies 56-67 million 19-23 million
Contribution to GDP 50% - 60% Up to 33%
Contribution to Employment 50% - 70% 10% - 40%
SMEs contribution to selected economies
Source: 2015, SME enterprises & decent & productive employment creation, ILO.
MENA region lags behind in job creation
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49.5 49.042.5 41.0 40.0
35.730.2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
South Asia OECD East AsiaPacific
LatinAmerica &Caribbean
Sub-SaharanAfrica
Europe &Central Asia
MENA
SME Employment as a Percentage of Total Private Employment, by Region
Source: World Bank Enterprise Surveys (2006-2009).
South Asia has the highest SMEs employment as a percentage of total private
employment (49.5%) followed by the OECD (49.0%), and MENA region (30.2%).
SMEs dominate in the formal sector, while others remain in the informal sector
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SMEs in the MENA Region: 80% to 90% of all formal sector enterprises. 20% to 40% of all private sector employment. Under-counted in official records due to imprecise records, varying
definitions of SMEs and high share of informality.
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Region No. of SME (Million)
% of total SME worldwide
Total Formal SMEs(Million)
East Asia 170-205 44-46 11-14
Latin America 47-57 10-12 3-4
Sub-Saharan Africa 36-44 8-10 3-5
Central Asia & Eastern Europe 18-22 3-5 2-4
South Asia 75-90 16-20 2-3
MENA 19-23 4-6 1-3
High income OECD 56-67 12-14 11-14
Total 420-510 100 25-30
Estimated number of SMEs worldwide by region
Source: 2015, SME enterprises & decent & productive employment creation, ILO.
Potential for SMEs’ Job creation in MENA countriesNonetheless, the region lags behind in SME employment.
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SMEs are generally more labor-intensive compared to larger firms. Innovative enterprises report higher employment growth rates. The social benefits of job creation are higher for SMEs. SMEs increase the tax base. End result: Government support to SMEs may be more effective than alternative
policies (like unemployment benefits).
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SMEs as Employers in Selected MENA Countries
Additional SMEs advantages
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Sources of SME competitive advantages:Greater flexibility to respond to changing global market
conditions.Product differentiation (according to SME profile & business
model).Better inter-firm linkages along domestic supply chains Emergence of network-based modes of innovation, especially
when supported by specialized clusters.Green entrepreneurs (SMEs represent over 90% and 70% of
clean technology businesses in the UK and Finland, respectively). Shifting supporting programs from focusing on spreading
technology to raising their capacity to absorb technology.
Conclusion: supervisory authorities should strengthen their legalframeworks and update them to catch up with the evolvinginnovations.9
SMEs face many challenges
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According to the World Bank Group Enterprise Surveys; access to finance topsthe list of constraints faced by SMEs with 16.5% expressing it as their biggestobstacle across countries.
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16.513.5
11.811.3
8.28.0
6.55.3
3.03.03.03.0
2.82.6
1.0
0.0 5.0 10.0 15.0 20.0
Access to finance
Access to electricity
Informality
Tax rate
Political instability
Inadequately educated workforce
Corruption
Crime, theft and disorder
Transportation
Tax administration
Customs & trade regulations
Access to land
Business, licensing & permits
Labor regulations
Courts
Major constraints faced by SMEs across countries
Source: 2015, SME enterprises & decent & productive employment creation, ILO.
limited market access to global markets given their small size
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Challenges: Access to financial services:
Difficult macroeconomic environment. Funding gap due to the lack of venture capital, financial skills and financial
literacy. Risk weighting in the realm of the implementation of Basel III accords.
SMEs are lagging behind in: Adopting Digital Technologies & participating in E-commerce. Investment in knowledge-based assets, such as R&D, human resources. Limited in-house innovation processes and organizational capabilities.
Participation in global markets and value chains is uneven across SME firms. Challenges are compounded by:
Internet connectivity issues and web presence. Lack of renting computer power (use of big data) High job turnover, which poses problems for employment security. Relying on external recruitment instead of investing in training. Regulatory burdens. High costs of tax compliance12
Business Conditions, Financing and regulatory frameworks should Strive to create a fostering environment
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Digital Technology: Ease SMEs’ access to skills and talent. Improve market intelligence and access information at low costs. Facilitate enhanced access to a range of financing instruments. Increase their opportunities to enhance competitiveness locally and globally. Increase capacity for product/ service innovation and production process.
Regulatory Frameworks: Simplification of regulations and administrative procedures. Reforms to tax administration and bankruptcy procedures. Regulatory impact assessment Improved availability and provision of information. Digital technologies to reduce administrative burdens.
Supply Chains: Seize the opportunities offered by multinationals in search of a local supplier
base. Clustering can help SMEs achieve product differentiation, upgrading and
sourcing to export markets.
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Business Conditions, Financing and regulatory frameworks should Strive to create a fostering environment
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Access to finance:
Digital transformation holds potential to improve SME access tofinance.
Reduce the asymmetry of information between lenders andborrowers through credit bureaus and credit registries.
Broaden the range of financing instruments available to SMEsand entrepreneurs.
Increase SMEs’ resilience to changing conditions in creditmarkets through strengthen SME capital structures.
Broaden government financing and loan-guarantee initiatives.Adequate support for the emergence of “lean start-ups”
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Rationale for government support to SMEs’ Financing
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Market-determined interest rates are expected to be high to compensate for: (1)high administrative costs, (2) insufficient collateral, and (3) high default.
SMEs suffer more than large firms from many policy and institutional constraintsarising from imperfect markets.
High transaction costs is due to: Inappropriate accounts/ financial statements/ audits. Information processing (absence of reliable credit registries…) Red tape. Non-conducive legal and regulatory frameworks as well as weak judicial and
legal systems. Variance in profitability due to higher interest rate and credit rationing due to
shortage of collateral. Insufficient collateral:
Land: Lack of appropriate land titling. Machinery: absence of effective Movable Assets Registry.
SMEs are deemed as highly risky. Government support without accountability may encourage Moral Hazard.
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Rationale for government support to SMEs’ Financing
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Lack of sufficient financial track records. High fixed costs for banks for processing loan applications. The gap in credit costs between SMEs and large enterprises remains wide as the
decline in interest rates in the post crisis period benefited large enterprises morethan small ones.
17 Source: OECD, 2017.Enhancing the Contributions of SMEs in a Global and Digitalized Economy
Interest rate spreads between loans to SMEs and to large enterprises
Rationale for government intervention: The Social benefits of job creation & easing market access
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Social benefits of Job creation: SMEs are generally more labor-intensive compared to larger firms. The social benefits of job creation are higher for of SMEs. Substantial fixed cost to tax regulatory requirements and compliance costs. End result: Government support to SMEs may be more effective than
alternative policies (like unemployment benefits). Easing Market access constraints: Credit Reporting Systems & Secured Transactions Frameworks (including
movable assets registries). Credit lines, Guarantee Schemes, State Banks, SME Exchanges, SME Funds,
Reforms to encourage leasing, factoring. Financial Education, Training, Awareness Campaigns. Improved access to capacity building support for SMEs & guide them through
red tape challenge. SME to obtain patents for new ideas/ techniques. Scaling up incubator operations to accelerate SMEs developments. Regulations should focus on creating enabling environment and compensating
SMEs of adverse externalities.18
Limits to SME Development in Arab Countries
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AMF Main Findings (Arab Consolidated Economic Report, 2013): Limited access to finance Weak in guarantees and collateral Inadequate business environment Regulatory constraints Poor management systems
Bank funding of SMEs: Highest in Morocco (24%), followed by Egypt (13%), andJordan (8%).
SME listed Value on the stock markets remain limited
Egypt Morocco Jordan
Banking Sector Loans to SMEs (% of Total) 13% 24% 8%
SME Listed Value on the stock market (% of GDP) 0.1% 4.5% 1.0%
SMEs Financial indicators
Morocco: Current SME Landscape
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Share of SMEs in economic activity
Central Bank of Morocco sponsored an agreement between banks and SMEassociation with focus on: Banks to adopt a standard loan file for SMEs Banks committed to take guarantees related only to companies Information such as accounting data to be provided by borrowers to the
authorities A National Committee was entrusted with follow-up and monitoring
implementation of SME development agenda
Total GDP Total Exports Total Employment
40% 30% 50%Source: Bank Al-Maghrib
Morocco: Role of the national agency for SMEs development
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Programs Description/ Target Targetedfield
Number of Targeted SMEs
(Annually)
IMTIAZ - Target SMEs with high growth potentials- Support financially up to 20% of total investment
Allfields
80
MUSANADA
Strategic, organizational, quality, and informatics support
Allfields
700
INFITAH Support SME owner in the specific field
IT 1500
INMA Support and raise production by 25% and reduce costs by 20%
All fields
100
Source: Bank Al-Maghrib
Morocco: Complementary role of FINIA and other programs
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FINIA main objectives:1. Program to enhance SME access to public procurements2. FINIA guarantees 60% of credit to SMEs, and not higher than USD
800,000 per company.
FINIA achievements:
Number of companies Benefited since 2008: 674
Total credit granted since 2008: USD 135 million
Additional Targets:- Allocate 20% of government purchase to SMEs.- Establish Movable Assets Registry- Establish a quick dispute settlement system outside the judicialsystem.
Source: Bank Al-Maghrib
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Jordan: Current SME Landscape & Central Bank Initiatives4
Importance of SMEs in Jordanian Economy:
Set up of the Innovative Entrepreneurship Fund: collaboration betweenCentral Bank of Jordan (CBJ), Ministry of Planning, World Bank and JordanLoan Guarantee Corporation, with USD 98 million capital for innovativestart-ups.
In 2012, a program was launched to finance SMEs in selected economicsectors: Industry, Engineering Consultancy, IT, Renewable Energy, tourism,and Agriculture.
Loans to the selected sectors provided at 1% interest rate (outside Amman),and at 1.75% interest rate for projects in Amman.
Share of SMEs out of total companies
Share in job creating by SMEs
Share of SMEs in total GDP
95% 70% 40%Source: Central Bank of Jordan
Benefited projects: 754
Overall amount: USD730 million
Created Job opportunities: 6300Source: Central Bank of Jordan
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Egypt: Current SME Landscape
Currently performing SMEs are about 2.5 millions (MTI). Share of SMEs in:
According to the AMF, more than 14 initiatives were launched that benefited more than 2 million companies.
SFD objectives: Emphasis on gender equality to achieve sustainable economic growth Empowering women and increase their access to resources Raise awareness of the importance of women’s entrepreneurship and
enhance women capacities SFD Initiatives:
Provide non-financial support to women entrepreneurship. Enhance SME representative at the local and national levels. Institutional support to stakeholders for SME development.
Total Employment Total Exports
75% 17%Source: Ministry of Trade and Industry (MTI) 2016-2020 strategy report
Banks hesitate to finance SMEs, especially microenterprises
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As at end of June 2018, bank lending to SMEs represented 6% of domestic creditand 8% of credit to the private sector.
Share in credit to SMEs: Microenterprises (12%), small enterprises (35%), andmedium enterprises (53%).
Sector Service Industrial Trading
Category
Number
of Employee
s
Total
Turnover
(AED)
Number
of Employees
Total Turnover
(AED)
Number
of Employees
Total Turnover
(AED)
Micro Up to 5 Or Up to 2 Mln Up to 9 Or Up to 3 Mln Up to 5 Or Up to 3 Mln
Small 6 – 50 Or 2 - 20 Mln 10 – 100 Or 3 - 50 Mln 6 – 50 Or 3 - 50 Mln
Medium 51 – 200 Or 20 - 200 Mln 101 – 250 Or 50 - 250 Mln 51 – 200 Or 50 - 250 Mln
UAE SMEs definitions
Services get the lion’s share in credit to MSMEs, while Manufacturing gets 19% of total credit
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Sectoral shares in bank credit to MSMEs (June 2018)
Trade Manufacturing Services
Microenterprises 4.2% 4.2% 3.3%
Small 15.9% 5.7% 13.5%
Medium 23.5% 8.9% 20.6%
UAE SME Action Plan: A High Level Coordination Committee (HLCC) established for design and monitoring
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The Committee set up a dedicated Working Group tasked with:
Identify Lead Stakeholder for each priority action, the inter-dependencies,
and the deadline for implementation, followed by regular reporting to HLCC
Main Priorities: (1) Financing, (2) Institutional Framework, (3) Promotion
of SME Supporting Ecosystem
The draft of the Central Bank SME Regulation will request banks to:
- Have a dedicated SME unit, with internal strategies for SME lending, with simple
SME application procedures, and reasons in case of rejection, and assigning risk
weight of 75% to SME loans
Enhancing SME access to credit at a lower cost
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Emirates Development Bank set up the Electronic Movable Assets Securitization
Registry (for equipment, inventory, accounts receivable, cash flows…)
For effective use of the Registry: Need for low cost for registration by SMEs and
search by lenders.
Strengthen Al Etihad Credit Bureau: SME scores will constitute the basis toassess default and allow banks adopt risk-based pricing
Establishment of a Federal Credit Guarantee Scheme (FCGS) with contributionof the federal government, banks and SME borrowers
Fees will be designed so as to minimize moral hazard and risk-taking
Provide alternative financing and effective dispute settlement
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Protect creditors and shareholders’ rights and remove constraints to
alternative financing:
Stock Exchange for SMEs: allow interested medium size SMEs to be listed on a
dedicated SME platform with less stringent conditions
Need effective implementation of The corporate Bankruptcy Law of 2016 and a
gradual decriminalization of bounced cheques, and reformed bankruptcy
regime for individuals
Establishment of the Credit Ombudsman Office.
Improve the quality of book-keeping, financial management and auditing of SMEs
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In absence of accurate audited accounts, UAE banks have to rely
on SMEs’ financial statements
Audit of SMEs should follow the standards set by
the International Auditing and Assurance Standards Board
(IAASB)
Effective financial management should be at the core of the
overall management system for SMEs
Impose high standards on Audit profession and adopt
professional licensing of auditors, to be shared among banks
Help SME business development and access to export markets
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Establish the Federal Small Business Administration entrustedwith: Providing asset-based lending (like CAP lines program in the
US), which provides asset-based credit lines for a short-termpurposes
Coordinate with the Export Promotion Authority to help SMEaccess to export markets
Establish a Federal Export Promotion Agency, whose maintasks: Inform SMEs about export opportunities through
participation to exhibitions in the UAE and abroad Facilitate matching with foreign buyers Provide training on trade finance and export operations Connect SMEs to trusted global export portals
Promote Venture Capital and other specialized companies and facilitate access to public procurements
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Initiatives to encourage:
Venture Capital to fund startups and SMEs with high growth
potential
Business Angels to fill the gap between startups and seed capital
Facilitate SME access to public procurements
Ministry of Finance has developed a system that allows all SMEs
to access federal tenders
Ensure timely payments to SMEs from the public sector at both
federal level and emirates level