Region’s lenders must accelerate technological progress
There is space for digital-enabled SMEfocused entities to make headway
While our current global economic situation has been expressed — both metaphorically and visually — as akin to falling off a cliff, there is one very sizeable group that has been teetering on the edge for some time.
Almost five years ago, the Asian Development Bank estimated a global trade finance gap of $1.6 trillion. Rejection rates for small and mediumsized enterprises (SMEs) was at 56 per cent. Today, those figures remain stubbornly high, despite significant changes in global banking — specifically in technology and regulation — th at have paved the way for greater assistance.
Critical sector
In the Middle East and North Africa (Mena) region, SMEs represent about 96 per cent of registered companies and roughly half of employment, yet account for only 7 per cent of total bank lending. This is the lowest level in the world.
Lenders to SMEs in Mena are, not surprisingly, facing a tougher time ahead. The Middle East banking sector is crowded and the current climate is challenging to say the least, with slower economic growth and weaker credit demand. This is set to become even more pronounced as public sector deposits dwindle due to government withdrawals of resources to top up budgets in the wake of reducing oil prices.
In its 2019 paper, Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia, the IMF identified six structural elements required to bridge the financing gap for SMEs in the region. Notably — though perhaps unintentional — fintech, including information management, reduced regulatory compliance costs, and innovative lending channels, was the last deck to be added to the structure.
Without taking anything away from the other vital components, fintechs — or more broadly speaking, taking a digital transformation approach to the problem — should now be a major priority for Mena banks. Embarking on or even accelerating efforts in this space will not only help to free up finance for SMEs — boosting economic growth and employment in the region — but from an organisational perspective, reduce costs, optimise efficiency and create new opportunities for banks.
Historically, efforts in the region to embrace digital transformation have been hobbled by technology choices that focused on finding a one-sizefits-all solution.
More enablers
Crucial to driving initiatives like these are accelerator programmes like Abu Dhabi’s Ghadan 21. In addition to investments made in its first year, the programme recently announced a stimulus package in the wake of Covid-19, including a credit guarantee scheme for Abu Dhabi based SMEs.
Positive signs of movement in the right direction, to be sure. Considering the strategic, operational and technical expertise available, there’s no reason why digital transformation efforts shouldn’t accelerate.