SMEs in the Middle East and North Africa (MENA) contribute approximately $1 trillion to the region’s economy per year, accounting for 96% of registered companies and employing approximately half of the workforce. Unsurprisingly, these businesses are the backbone on MENA’s rapidly evolving economies and are being recognised as a priority among the region’s governments. However, SMEs face fundamental obstacles to their potential growth, namely stringent regulations and compliance procedures, but chiefly access to finance. Indeed, traditional lenders have typically shied away from smaller and less established businesses, in the wake of the financial crisis, instead opting for the assurances of larger companies.
However, as the region’s SMEs grow in importance, opportunities for alternative finance providers are emerging to plug the finance gap. Traditional lenders, including banks, are having to adapt and are increasingly responding to these needs and leveraging technology to ensure SMEs can tap into their full potential.
SMEs emerging as a priority
As the region shifts its economic focus away from oil to economic models that enhance the role of the private sector, governments have recognised the importance of SMEs. The added value of jobs and economic growth offered by these businesses has meant that SME have become a priority. For example, Dubai’s Department of Finance has most recently announced a set of initiatives to boost the UAE’s fledgling SMEs, which have grown by over 30% in the last decade. Among these initiatives, the government has committed to allocating 5% of the government capital projects to SMEs.
Financial crisis still resonates for banks
With SMEs therefore seen as a catalyst for economic growth, they still face major obstacles that stop them from reaching their potential. Following the financial crash in 2008, access to funding has been more limited in the region and indeed globally.
SMEs face a $260 billion credit gap in the region, with just one in five SMEs benefitting from traditional finance and accounting for only 7% of bank lending. But now, the attitude of lenders, such as banks, is having to catch up as these businesses take on their role as pivotal contributors to economic growth.
Various types of alternative finance emerging
As a result of the credit gap faced by SMEs, innovative alternative financing options have emerged, fuelled by the increasing digitalisation of businesses in the region. Funding models, such as Peer-2-Peer lending are seeing growth increase, from $4.5 million total market volume in 2014 to $32.5 million in 2016. Over the same period, equity-based crowdfunding has enjoyed growth from $62 million to $100.32 million. 
However, there are indications that this growth is slowing, where the lack of regulatory clarity and flexibility is making the activity of alternative finance providers more complicated.
Opportunity for traditional lenders fuelled by technology
The lack of regulatory clarity for alternative finance providers has created an opportunity for traditional lenders, such as banks - an opportunity they are beginning to tap into. The increasingly sophisticated digitalisation of finance has also enabled traditional lenders to adopt these processes, allowing them to mitigate risk and broaden their offering, making bank lending more accessible to SMEs.
One example of this is the growth of established models such as asset based financing and factoring. As this form of finance has evolved, the emergence of new technologies has improved its appeal to banks, making a long-established model increasingly effective, efficient and ultimately more attractive. This has resulted in asset based financing growing by 7% in the Middle East in 2018 alone - not far behind the global figure of 9%.
The increased take-up of such technologies by banks means that they can now not only compete with alternative finance providers to provide modern financing to SMEs, but they can also partner with these providers to evolve their offering even further.
MENA is experiencing a period of exceptional growth for SMEs, but in order to realise the true potential of these businesses, we must place greater focus on access to funding. Only with better access to finance can these businesses unlock growth as they navigate supply chains, working capital gaps and encourage innovation. Well established lenders have in recent years shied away from such businesses, but as technology evolves and the popularity of alternative finance providers signal the changing demands of businesses, there is an opportunity for them to tap into this market once again. Banks that recognise the opportunity to seize digitalisation and work to learn from the innovation in alternative finance, will be the ones who are working hand in hand with the region’s governments to ensure that the businesses that form the backbone of their economies reach their full potential.
Publication: Business Chief Middle East
Author: Claudia Perri, Regional Commercial Director for Southern EMEA of global Asset-Based Lending, Supply Chain Finance and Factoring platform, HPD LendScape