Lending to the Little Guy

The growth of small and medium businesses continues to be hindered by a lack of access to finance. But could recent initiatives change this?

By Jane Hosking

Growing an SME without access to finance is no easy task. Just ask Samer al-Jabari, founder and managing director of Focus Solutions, a small software company that develops applications and consulting services for financial institutions. He applied for three loans in the space of 10 years, but has encountered endless hurdles in his attempt to receive funding.

“Our experience of trying to get a loan with banks in Jordan was very difficult,” shared al-Jabari. “In the past we were thinking of expanding our operations to develop new solutions and to do a lot of marketing activities, but that was impossible.”

After a long struggle and three rejections in a decade, al-Jabari finally managed to secure two loans after having provided personal collateral.

Sadly, al-Jabari’s experience isn’t unique. According to the Central Bank, while SMEs make up 95 percent of all companies in the Kingdom, they receive only 10 percent of bank loans. Not only is this inhibiting the growth of individual SMEs, but also the growth of the larger economy.

On top of this, a lack of access to finance is undermining the potential of SMEs to hire more people and thus help address the Kingdom’s unemployment problem.

What makes matters worse for SMEs in Jordan is that they are more reliant on the banking sector than SMEs in other parts of the world where additional sources of finance, such as venture capital are more readily available. Adli Kandah, director general of the Association of Banks in Jordan, said around 90 percent of financing in the MENA region comes from the banks. While in the United States, it’s only about 65 percent. “We need to diversify the sources of financing in Jordan to make available other sources of finance,” Kandah said.

Why the lack of loans?

So what’s holding banks back from providing more financing to SMEs? Ghassan Muasher, Jordan Ahli Bank’s SME products and services development manager, said that while banks recognize the value of supporting SMEs they are seen as riskier clients than larger corporations. “In this part of the world banks are a bit risk averse. We always have to think about how to mitigate our risk,” he said. “We need to find a way to work out what we can do better to start evaluating these businesses in different ways to make a calculated risk assessment.”

One of the main concerns for banks, according to Muasher, is the SME’s inability to provide collateral to back up their financial needs. “It’s not our objective to claim collateral but it has to be done to protect the deposits of our clients,” said Muasher, adding that if SMEs don’t have enough collateral for a business loan then they need to have financials and a proven track record that banks can review in order for them to be confident that the loan will be repaid.

This, however, is also often a problem for many SMEs. According to Mohammad al-Amirah, head of the financial stability unit at the Central Bank, one of the biggest challenges facing SMEs when they try to seek a loan is the lack of data and information about their company, especially the lack of a credit record. “Most SMEs are too small to have financial departments and don’t know how to do a feasibility study, which means that banks can’t know the real potential of the company.”

Muasher agrees. “SMEs are generally not set up to be able to work with a bank. While they might have the technical skills to manage their business, when it comes to setting up financials and financial management, some lack the capabilities and skills needed to effectively manage the operating expenses of their business,” he said. “It’s very hard to pitch an idea to the bank if there’s no real documentation and if there are no financials to help us evaluate the business, such as sales, growth, and cash flows, which allow us to assess their ability to pay back the loan.”

This lack of financial savvy when attempting to win the trust of a bank is something that needs to be addressed, according to Lina Hundaileh, chairwoman of the Young Entrepreneurs Association (YEA). “As SMEs we don’t have enough information about finance. We need banks to not only give us loans, but also to act as consultants for us, because SMEs are totally different to the big players. While they have financial departments, we don’t,” she said.

But according to Heike Harmgart, the head of the EBRD’s Jordan office, banks too are often not set up to deal with SMEs. “Local banks are only starting to look at this segment and have not yet developed many tailored SME products,” she said. Harmgart added that banks need to look at their loan products and risk assessment methodologies and move from a collateral based lending model to a cash flow based lending model. This she believes would allow them to understand the business propositions of SMEs much better.

The Central Bank’s al-Amirah similarly acknowledges that banks could be doing more, noting that while there are 18 banks in Jordan that have special units to service the SMEs, they need to work further to “enhance their abilities and expertise of dealing with SMEs, and understand their special needs.”

In al-Jabari’s experience of applying for a loan, he believes his company was disadvantaged because banks aren’t used to dealing with SMEs from the services sector. “There are many business models that are not supported by banks. The IT industry, for example, is not supported by them because they say that your assets are intangible,” he explained. Al-Jabari found that while his company has assets in the form of intellectual property, banks would not consider this as collateral. “Banks should not deal with each different sector of SMEs as if they are the same. If you are dealing with an IT company you should have certain criteria and if you’re dealing with a manufacturing company you should have a different criteria,” said al-Jabari.

In order to be successful in getting a loan, Hundaileh believes that SMEs require pre-existing connections with banks. “Most of the banks say that they have a department for SMEs and that they want to help SMEs, but unfortunately if you don’t have a personal relationship with the bank, even though they say they help and support SMEs they often don’t,” she said, adding that loans should instead be judged on a company’s business plan, management, and strategies.

New Initiatives

Despite the challenges that remain for SMEs in gaining financing from banks, various initiatives and programs have been implemented in recent years to change this for the better. The EBRD, for example, has recently provided long-term financing to Bank al Etihad and Cairo Amman Bank, along with targeted technical assistance for capacity building and SME product development. According to Harmgart, they have approved $150 million of financing to encourage banks to lend to SMEs and they hope to add more banks in the course of the year to the program.

Another significant initiative has come from the Overseas Private Investment Corporation (OPIC), the US Government’s development finance institution. According to Kandah of the Association of Banks, OPIC brought a loan guarantee program to Jordan in 2011 of $250 million. This means that if a bank wishes to provide a loan to an SME and there isn’t sufficient collateral, then OPIC can step in to provide between 60 to 75 percent of the loan guarantee. Kandah said that up until now, seven banks have been involved in the program and approximately $50 million of the funds have been used.

The Jordan Loan Guarantee Corporation (JLGC), which is 48 percent owned by the Central Bank, is providing a similar program. The main purpose of the company is to establish a fund to guarantee loans with high risks, which usually can’t get credit faculties from banks. “Our aim is to fund startups and other high risk companies,” said al-Amirah.

Muasher believes that for banks like Ahli, programs such as those provided by OPIC and the JLGC allow them to support SMEs much more easily. “We definitely utilize those two programs to help give access to finance to a lot of SMEs. They are key strategic relationships that help us work with some clients that we wouldn’t be able to work with in other circumstances due to the collateral issues,” he explained.

The Central Bank has also long been working to increase support for SMEs. This includes creating strategic partnerships with different financial institutions such as a low interest, long-term loan of $70 million from the World Bank in 2013, which was distributed between 12 banks to provide finance to SMEs. According to al-Amirah, within 18 months, 6,000 SMEs—60 percent of which were located outside Amman—benefited from this loan, with interest rates as low as 5 and 6 percent. The Central Bank is now working with the World Bank to gain an additional loan of $50 million.

What’s more, according to al-Amirah there are several credit facilities working in Jordan— eight of which are working under the supervision of the Central Bank that grant small loans of JD500 on average to micro companies. Al-Amirah said that up until 2014, these credit facilities had provided loans to almost 300,000 companies.

Many banks in Jordan are also starting to make efforts to better serve SMEs. Ahli Bank, for example, saw a need to better equip SMEs to work with banks and so established the Jordan Ahli Bank Academy Unit for SMEs in 2012 that provides financial and advisory services. This free educational program offers one-day workshops to any SME that wishes to sign up, covering topics from finance and accounting to marketing and sales. So far, Ahli Bank has conducted over 43 workshops and had over 1,000 participants. Muasher said this program is designed to help give SMEs a better chance of gaining access to finance from banks. “The SME academy unit is a way for us to help empower SMEs and support them in managing their business. In turn, we expect the SMEs that follow these practices will be able to work better with banks,” he said.

Looking to the future

Despite this progress in supporting SMEs with additional financing opportunities, regional economic uncertainly is inhibiting progress, according to Muasher. “I think with the current economic situation it’s difficult,” he said, adding that while they continue to lend to SMEs and are looking to increase this in the future, the troubles in Iraq and Syria have proved a challenge for many companies. “A lot of businesses in Jordan trade with Iraq and Syria, and a lot of them were hit by the current political situation. As a result the economy is taking a hit and I think business is slowing down,” he said. “But companies are looking for opportunities to expand into other areas and we are supporting them with that.”

There is no doubt among all players in the finance sector that SMEs are the backbone of the Jordanian economy and that providing them with greater access to finance is essential for economic growth, which will benefit not only SMEs but banks as well.

Harmgart hopes that banks will continue to build on the recent promising developments. “Once banks realize that this is a growth area, and that they are able to manage the risks and make profits, this will take off,” she said. For Muasher, this is already apparent. “If we aren’t able to support SMEs and help them grow, then we’re not allowing businesses to create new jobs, and we’re not enabling the economy to grow. And if the economy overall isn’t performing well then banks won’t perform well.”