Helping SMEs to Expand the MENA Economy admin 05.05.2022

Helping SMEs to Expand the MENA Economy

The Middle East and North Africa (MENA) are some of the fastest-changing regions in the globe. The key stakeholders in this transformation are the small and medium enterprises (SMEs) and entrepreneurs that are working to devise solutions for the local youth population. A majority of the young population is currently underserved in terms of technology and solution viability. However, the growth of these stakeholders is central to the broader development of the region. 

MENA Demographics – Widespread Opportunity 

The MENA region is amongst the most rapidly growing regions in the world. With a high youth to adult ratio, the region has over 30% of its population between the age of 15 and 29. This youth population represents a significant opportunity for businesses in the region to capitalize on local talent and accelerate growth. However, key challenges in the region exist in the form of unemployment. 

According to a recent report by Khaleej Times, unemployment in the region stands at 25%.

The figure represents over 100 million unemployed individuals around the region. In countries like Egypt, the condition is even more grave, with the majority of unemployed individuals being below the age of 30. 

The region needs to create over 40 million employment opportunities over the next few years to ensure that its youth is productively utilized. Contributing factors to the current scenario have been political instability and lack of opportunities.

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Existing Digital Asset Landscape – Scale of Adoption 

 

According to leading platform CoinMarketCap, over 1600 crypto tokens have managed to gain public transactions over the past few years. 

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Even though the conventional result of political instability and concerns is in the form of investor concerns, the region also presents a promising landscape of development. With the involvement of local stakeholders, the region has the ability to provide unparalleled productivity. Supporting small enterprises in the region is a central facet of creating opportunity and improving employment creation. 

According to research by Milken Institute, Small and Medium Enterprises (SME’s) contribute over 50% of the Gross Domestic Product (GDP) of developed nations. 

This is in stark contrast with the 16% output in developing economies. However, the landscape is rapidly evolving with the development of local startup ecosystems in MENA economies. SMEs are currently a driving force in the local economies of countries like Egypt. The country has witnessed consistent economic growth over the past years centered around contributions by small businesses in the region. 

Despite the progress made in the region, businesses are still facing an array of challenges that are inhibiting progress. 

Challenges to SME Growth in MENA Region 

Even though efforts have been made by central banking authorities and financial institutions to improve credit enhancement, the current landscape makes it challenging for SMEs to have access to financing. 

McKinsey estimates that there are over 2 million SMEs in the MENA region, with a financing gap ranging from $120 billion to $150 billion. SME lending in the countries is only a minor percentage of the broader lending for banks. Compared to the 27% ratio for OECD countries, SMEs in MENA only make up an 8% chunk of the lending equation. This is despite the fact that most banking authorities in the region have access to significant capital resources without minimal leverage allocation. 

To counter the existing challenges, it is essential to implement working models that address the key concern of investors and provide a viable growth pathway to SMEs.

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Working Models in MENA Region  

The primary challenge in the region is to provide access to capital to keep up with the growth requirements of startups and small businesses. Local licenses are essential for investment companies to provide viable debt and equity-based investment options to local entrepreneurs. These capital allocations can fund the future growth of funds. Investment firms need to divest towards local licensing to ensure sustainable growth and maintain an active presence in critical regional localities. 

Microfinance Model 

Even though Microfinance enterprises create a limited number of jobs, they are able to bridge gaps by creating jobs in newer segments. Implementing purpose-driven investing models in the region is central to ensuring investors’ interest and providing a viable mechanism for local businesses. 

Due to the religious sentiment dominant in the MENA region, implementing Islamic financing models can present a viable model for investors to open credit allocations in the region. These models can provide a higher return for investors with positive sentiments from the local population. Islamic financing models in the region have also been approved by governing religious bodies, which makes them the optimal model to support small businesses in the region. 

SME Financing 

SMEs are critical factors in driving local growth and creating employment opportunities for local populations. Small businesses can be considered to be the most important element of growth in the region, especially for young individuals in the country. The financing model diversifies the acting risk across key sectors and prioritizes sectors with positive local growth. The implementation of the model incentivizes local businesses to shift to better accounting and planning systems with incentives to attain loans without present business plans. The allocation of microloans for businesses can also promote the development of microbusinesses to the category of Small and Medium Enterprises (SMEs). 

Complete SME Banking 

There is a wide range of incentives that banks can avail of by providing banking services to the local SME market. Even though there is a wide range of potential models in the region, the banking allocation in the region can be supplemented with a regional credit assessment team to minimize portfolio risk and improve portfolio allocations to appropriate target segments. The extension of SME banking can pave the way to a culture shift and help local businesses achieve sustainable growth. The approaches require extensive local research by loan managers to ensure that the allocation accommodates potential risk in local markets. 

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Committed to SME Growth – The DIF Initiative 

DIF strongly believes in the importance of SMEs and microbusinesses within the regional economy. As a leading stakeholder, we’re actively supporting the creation of initiatives to extend financing options for local businesses. DIF experts forecast aggressive SME growth in the region backed by increased shareholder interest and the opening of the local economies after the pandemic.

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