SME’s are the most important resources of innovation and at the same time origins of growth and job creation. SMEs account for between 80 percent and 95 percent of formal sector enterprises in MENAP and the CCA, they only contribute about 30 percent of GDP and 20–50 percent of private sector Employment where as in the Organization for Economic Co-operation and Development, SMEs account for more than 95 percent of enterprises and up to 70 percent of employment ( No doubt SME’s are the growth engine of emerging economies including Saudi Arabia.

However a key factor inhibiting SME growth is access to financial support. In the developed countries around 40% of total bank lending is to SME’s and in Asia this is around 20% where as in Saudi Arabia this figure is as low as under 4%. This IMF chart paints a clear picture of where SME lending currently sits, MENAP being right at the bottom of the pile.


loans 2 SMEs

According to the Asian Development Bank’s SME Access to Financial Services in the Developing World – indicated that between 45% and 55% of formal SMEs do not have access to loans from formal financial institutions in developing countries. This ratio increases to 65%–72% if informal SMEs and microenterprises are included. The IFC and McKinsey & Company (2010) estimated the value of the gap in formal SME credit at $700 billion–$850 billion, the equivalent of 21%–26% of the total formal SME credit outstanding in the developing world. The gap in East Asia accounted for $250 billion–$310 billion, while that in South Asia accounted for $30 billion–$40 billion. As another indicator, the World Bank’s Consultative Group to Assist the Poor (CGAP) showed that only around 32% of SMEs had received a loan from a financial institution, compared with 56% of large firms (Financial Access 2010).

Once again according to ADB, as most Asian countries have established a bank-centered financial system, capital market financing is not a realistic option for SMEs. Thus, the average SME relies mostly on its own capital and/or informal borrowing from friends and family members for start-up funds and working capital. This condition impedes the creation and development of sound and competitive SMEs, and inhibits inclusive economic growth in Asia.

Saudi Arabia is no exception to this. The kingdom’s government has realized the importance of this sector to build a sustainable economy, and like all of the developed nations as well as emerging economies, embarked on programs to actively support SME sector growth. Typical barriers to accessing bank finance for SMEs include a lack of collateral (real estate security), brief or non-existent business track records, fragile financial and management systems, and the uncertainty of profitability (especially for R&D companies).

However the SME landscape is changing very fast, there is a vast difference between the way SMEs used to operate conventionally, and in the manner they are managed currently. They are now increasingly occupying the virtual space and are more inclined towards digitization. Amid this rapidly changing scenario, it has become vital for banks to take initiatives that adequately comply with the present-day financial requirements of SMEs, in order to not lose out on a significant segment of their clientele.

In advanced countries and some of the emerging economies there are banking and quasi banking institutions that cater to this segment, for example in the US there are hundreds of community banks that support SME’s, in India all the major banks including State Bank of India, IDBI Bank and Axis Bank offer a portfolio of SME loan products to SME customers. A good example in Malaysia is the SME Bank in Malaysia.

To better understand the approach that banks need to adopt while catering to SMEs, let us take under study the model of SME Bank, Malaysia.

SME Bank operates as a Malaysia-based financial institution, with the objective of providing growth and development support to SMEs. To work in line with its objective, the bank has introduced various financial funding schemes, programs and products that set a good example of extending financial support to SMEs.

SME Bank offers numerous financial products to fund and support SMEs, in order to help them meet their growth and revenue targets. Analyzing these products, you are to get a good idea about what SMEs expect from banks today.

• i-Biz Cash

i-Biz Cash by SME Bank offers financial support in terms of the provision of working capital to SMEs, without requiring them to pledge any collaterals. It complies with Shariah and is focused on helping SMEs with their growth.

• Contract Financing

The contract financing package offered by SME Bank provides integrated solutions through various financial facilities that are packaged together. It is mainly focused on providing support to contractors and sub-contractors. Through contract financing, SME Bank extends support for the completion of projects pertaining to construction, communication technology and provision of business services.

• Rolling Expenditure Advance Cash Scheme (i-REACH)

i-REACH is offered by SME Bank to provide help in the area of contract financing. i-REACH has been devised to provide funds for simple contracts, those pertaining to the fields of construction, landscaping, mechanical and civil engineering, etc.

• i-CASH

i-CASH provides financial support to individuals who may be interested in enterprising or need funds to support an already existing business.

• i-Enterprise Premise Financing (i-EPF)

i-EPF has been introduced by SME Bank to provide funding for a business premise. Availing i-EPF, SMEs can acquire funds to invest in a premise for their enterprise in a commercial area.

• Supply Assistance Scheme (i-SPLASH)

i-SPLASH provides financial support for short-term and direct contracts, without requiring any collaterals.

• Supplementary Renewed Facility (i-SURF)

Through i-SURF, SME Bank provides its existing clients with working capital.


This is just an example of how other countries are focused on this critical segment.

The landscape for SME banking in the gulf region remains nascent when compared to other markets. This provides both banks and SMEs an opportunity and a challenge:  an opportunity to introduce innovative solutions and services to a fast growing SME market that is hungry for support from both banks and incubators. It is a significant challenge for Saudi commercial banks to develop innovative SME lending products. Current studies show that in Saudi, banks’ loans for SMEs constitute less than 4% of their total commercial loans. Strict guidelines and unwillingness to take risks is likely to stifle the growth of SME banking. As for incubators, their current focus on eliminating risks and undervaluing SMEs in their portfolio will only hurt the industry.

There is no doubt that the SME segment is the future catalyst for economic, employment and financial growth in the region, and current initiatives to support it are fragmented and needs more structuring.


Tariq Linjawi