Front Matter Page


Middle East and Central Asia Department

Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia

IMF staff team led by Nicolas Blancher

No. 19/02

Front Matter Page

Middle East and Central Asia

Financial Inclusion of Small and

Medium-Sized Enterprises in the

Middle East and Central Asia

IMF staff team led by Nicolas Blancher and including Max Appendino, Aidyn Bibolov, Armand Fouejieu, Jiawei Li, Anta Ndoye, Alexandra Panagiotakopoulou, Wei Shi, and Tetyana Sydorenko


Front Matter Page

Copyright ©2019 International Monetary Fund

Cataloging-in-Publication Data IMF Library

Names: Appendino, Maximiliano, author. | Bibolov, Aidyn, author. | Fouejieu A., Armand, author. | Li, Jiawei (Research Analyst), author. | Ndoye, Anta, author. | Panagiotakopoulou, Alexandra, author. | Shi, Wei (Economist), author. | Sydorenko, Tetyana, author. | Blancher, Nicolas R., project director. | International Monetary Fund. Middle East and Central Asia Department, issuing body. | International Monetary Fund, publisher.

Title: Financial inclusion of small and medium-sized enterprises in the Middle East and Central Asia / IMF staff team led by Nicolas Blancher and including Max Appendino, Aidyn Bibolov, Armand Fouejieu, Jiawei Li, Anta Ndoye, Alexandra Panagiotakopoulou, Wei Shi, and Tetyana Sydorenko.

Description: [Washington, DC] : International Monetary Fund, [2019]. | At head of title: Middle East and Central Asia Department. | Includes bibliographical references.

Identifiers: ISBN 9781484383124 (paper)

Subjects: LCSH: Small business—Middle East. | Small business—Asia, Central. | Finance—Middle East. | Finance—Asia, Central.

Classification: LCC HD2341 .A67 2019

The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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  • Executive Summary

  • Introduction

  • 1. Why SME Financial Inclusion?

    • The SME Financial Inclusion Gap

    • Benefits from Increasing SME Financial Inclusion

  • 2. Scaling Up Bank Credit to SMEs

    • Macro-Financial Aspects

    • Institutional Aspects

    • Key Priorities for MENAP and CCA Countries

  • 3. Potential Role of Alternative Financing Channels

    • Capital Markets

    • Fintech

  • 4. Policy Strategies—Unlocking SME Financial Inclusion

    • Current Policy Initiatives

    • Need for Holistic Policy Approaches

  • Annex 1. Methodology for the SME Financial Inclusion Index

  • Annex 2. SME Financial Inclusion Gap

  • Annex 3. Growth and Employment Benefits of Increased Access to Financing for SMEs

  • Annex 4. Benefits from Relaxing Constraints on SME Financial Inclusion: Country-Specific Analysis

  • Annex 5. Access to Financing and Firm-Level Employment, Sales, and Productivity Growth

  • Annex 6. SME Financial Inclusion and Macroeconomic Policy

  • Annex 7. Drivers of SME Financial Inclusion

  • References

  • Boxes

    • Box 1. Literature—Benefits from Increased Financial Inclusion

    • Box 2. Literature—Macroeconomic and Institutional Determinants of Financial Inclusion

    • Box 3. Alibaba in China: SME Lending and Asset-Backed Securities

    • Box 4. NewConnect in Poland: SME Stock Exchange

    • Box 5. Dubai International Financial Centre and Fintech Development

    • Box 6. SME Financial Inclusion—Key Regional and International Organizations

  • Figures

    • Figure 1. SMEs in the Economy

    • Figure 2. SME Financial Inclusion Index

    • Figure 3. SME Financial Inclusion, Economic and Financial Development

    • Figure 4. Growth and Employment Benefits of SME Financial Inclusion

    • Figure 5. SME Financial Inclusion and Macroeconomic Policy Effectiveness

    • Figure 6. Public Investment

    • Figure 7. Credit to Private and Public Sectors

    • Figure 8. Banking Sector Characteristics

    • Figure 9. Employment Growth Gains from Reaching Average Credit Bureau Coverage of Emerging Market and Developing Economies

    • Figure 10. Strength of Legal Rights Index

    • Figure 11. MENAP and CCA: Decomposition of SME Financial Inclusion Gap

    • Figure 12. SME Financing—Key Sources

    • Figure 13. SME Financing and Capital Markets

    • Figure 14. Capital Markets in the MENAP and CCA Regions

    • Figure 15. Enhancing Traditional SME Finance

    • Figure 16. Types of Fintech for SME Finance

    • Figure 17. Fintech Ecosystem

    • Figure 18. Framework for SME Financial Inclusion

  • Tables

    • Table 1. Capital Markets Ecosystem for SMEs—Policies and International Practices

Executive Summary

The importance of financial inclusion is increasingly recognized by policymakers around the world. Small and medium-sized enterprise (SME) financial inclusion, in particular, is at the core of the economic diversification and growth challenges many countries are facing. In the Middle East and Central Asia (MENAP and CCA) regions, SMEs represent an important share of firms, but the regions lag most others in terms of SME access to financing.

Improving SME financial inclusion can help increase economic growth, job creation, and the effectiveness of fiscal and monetary policy and could also contribute to financial stability. In the MENAP and CCA regions, the potential benefits are particularly high: annual economic growth could, in some cases, be boosted by up to 1 percent, potentially leading to about 16 million new jobs by 2025 in these regions.

International experience suggests that many factors can help scale up SME bank credit, including

  • Economic fundamentals and financial sector characteristics, such as macroeconomic stability, limited public sector size (to avoid crowding out SME access to credit), financial sector soundness, a competitive banking system and, more broadly, a competitive and open economy that could boost SME investment and demand for credit.

  • Institutional factors, such as strong governance and financial regulatory and supervisory capacity, credit information availability, and a supportive business environment, including modern collateral and insolvency frameworks, and legal systems that allow to adequately enforce property rights and contracts.

In addition, alternative channels can facilitate greater SME access to financing, including by supporting the supply of bank credit. Cross-country experience shows that capital markets can play such a role at various stages of SME development. Similarly, fintech can both help reduce constraints on bank credit (for example, credit information or competition) and open new channels for SME financing. Both capital markets and fintech are still nascent in the MENAP and CCA regions.

A range of policies and reforms have already been implemented across countries to support SME financial inclusion. These include direct interventions to enhance bank credit, such as through state-owned SME banks, credit guarantee schemes, and interest rate regulations. In recent years, a growing number of countries have also developed national strategies to address key obstacles to household and firm financial inclusion.

A key conclusion is that partial approaches, such as policies focusing solely on direct public financing or guarantees, are unlikely to yield large benefits. Rather, meaningful, safe, and sustainable SME access to financing requires a holistic approach covering the key building blocks listed above, from macroeconomic to legal and regulatory aspects. This approach can also trigger a virtuous circle of greater SME transparency and reduced informality, bringing about broader benefits to the economy and stronger demand for credit. Finally, specific policy and regulatory frameworks are needed to encourage the development of SME financing through greater reliance on capital markets and new technologies.

The policy framework proposed in this paper can help support policymakers in formulating and implementing country-specific reform strategies for greater SME financial inclusion. The IMF and other international organizations have important roles to play in providing analytical input and concrete policy advice based on the various aspects of this framework, building on lessons from international experience.

Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia
Author: Mr. Nicolas R Blancher, Maximiliano Appendino, Aidyn Bibolov, Mr. Armand Fouejieu, Mr. Jiawei Li, Anta Ndoye, Alexandra Panagiotakopoulou, Wei Shi, and Tetyana Sydorenko