A significant share of firms in the MENA region feel disconnected from the traditional banking system, according to new report What’s Holding Back the Private Sector in MENA?
Compiled by researchers from the World Bank Group, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), the report found that banks in the region have adopted a cautious approach to lending based upon traditional technologies and conservative practices.
As a result, funds have been concentrated into just a small segment of the private sector, comprising predominantly large clients.
One impact of the trend, the report notes, is that young firms, which should be focusing their energies on growth, have instead “adjusted production strategies and expectations to the reality of limited involvement with the financial sector – even if this comes at the cost of losing possible growth opportunities.
It adds: “This ‘disconnect’ between firms and banks goes so far that in some economies, even the use of checking and savings accounts by firms is low. Instead, firms rely to a large extent on internal financing.”
The researchers recommend a clutch of policy initiatives for financial institutions and governments in the region to adopt so that smaller businesses will be able to thrive, rather than merely tread water.
“Capacity building for banks to strengthen their credit risk assessment would help those interested in lending to SMEs, without putting financial stability at risk,” the report points out. In addition, it says, reforms should be implemented to:
Incoming EBRD chief economist Sergei Guryev said: “Identifying the impediments and challenges that are affecting the private sector and economic growth in the MENA region will help our institutions support policy reforms that can create a favourable business environment.”
He added: “From the beginning of our engagement in the region, we focused on fostering the development of the private sector through tailored programmes, and investment in infrastructure and services – in addition to strengthening competitiveness, which is key to addressing unemployment: one of the region’s biggest challenges, particularly among women, the young and educated people.”
Guryev’s EIB counterpart, Debora Revoltella, said that finding a way to reconnect banks and firms “is crucial to enhance growth opportunities in the region and international financial institutions have the expertise and willingness to complement domestic policies”.
She added that her organisation’s Crisis Response and Economic Resilience Initiative for the MENA region – a scheme endorsed by the EU – will now see “a substantial stepping-up” of its workload, “with action and investment for growth, jobs, vital infrastructure and social cohesion”.