Scalling up SME access to bank credit requires limiting relative size of public sector: IMF paper

Hagar Omran
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Macro-financial and institutional requirements to scale up SME access to bank credit include limiting the relative size of the public sector; macroeconomic stability; sound and competitive banking systems; competition in the economy more broadly; strong and stable institutions, according to a newly released paper of the International Monetary Fund (IMF) on Tuesday entitled financial inclusion for small and medium- sized (SMEs) enterprises in the Middle East and Central Asia.

The requirements also include low corruption and political risk; sound financial regulatory and supervisory frameworks; with adequate incentives for SME financing; the availability of credit information, and strong legal frameworks (for example, for property rights, contract enforcement, collateralisation, and insolvency).

“This framework can also help coordinate support from regional and international organizations in enhancing SME financial inclusion,” the paper mentioned.

Key partners are multilateral development banks, intergovernmental organisations, standard setters, and private sector representative bodies, the paper said, adding that while some of these institutions directly provide or support financing to SMEs, all of them contribute toward sharing policy lessons from international experience and identifying key challenges and priorities for SME financial inclusion across countries.

The partners list includes 10 organisations which are the Arab Monetary Fund, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the International Finance Corporation, the International Organisation of Securities Commissions, the Islamic Development Bank, the Multilateral Investment Guarantee Agency, the Organisation for Economic Co-operation and Development, the Union of Arab Banks, and the World Bank

The implementation of financial inclusion strategies have recently accelerated In the MENAP and CCA regions, said the paper explaining that many countries in the MENAP and CCA, have started to deploy such strategies and have undertaken important initiatives to improve the regulatory framework for financial access, over the past few years.

The interconnected factors that drive SME financial inclusion require holistic policy strategies, noted the paper, adding that a broad range of requirements must to be in place to unleash SME financing, including proper macroeconomic and financial policy frameworks, as well as legal and regulatory conditions that are critical to developing a strong SME credit culture and risk management practices


Efforts to promote safe and sustainable SME financial inclusion should therefore be part of policy strategies that are both comprehensive and tailored to country-specific circumstances, elaborated the paper.

Such strategies are also likely to trigger a virtuous circle of greater SME transparency and reduced informality, bringing about broader benefits to the economy, said the paper.

However, the paper affirmed that partial policy approaches, such as strategies focusing solely on direct public financing or guarantees, are unlikely to yield large or durable benefits.

Additionally, the paper said that Fintech investments are still low in both MENAP and CCA compared to global levels, but they are increasing rapidly in some countries.

The UAE, Lebanon, Jordan, and Egypt host three-fourths of the MENAP startups and have established large fintech accelerators, noted the paper.

Fintech companies in both regions have focused primarily on payment solutions, marketplace lending, and crowd funding, including for SMEs.

There are several factors that prevent entrepreneurs from accessing credit, including asymmetric information, higher cost of serving the SME sector, and limited financial literacy, which affects SME credit demand.

Relaxing these constraints could significantly boost the share of firms with access to credit and raise economic potential.

Countries such as Egypt, Pakistan, and Uzbekistan could improve long-term output by several percentage points by mitigating such constraints.

Financial inclusion is driven mainly by macroeconomic and institutional fundamentals including economic development which capture country characteristics such as quality of infrastructure; education; health as well as governance; credit information availability; economic competition; business environment, and contract enforcement.

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