Small Businesses, Big Impact: Addressing the Finance Gap in MENA

Small and medium-sized enterprises (SMEs) with fewer than 250 employees are the backbone of the economy, significantly outnumbering the multinational firms that have become household names in an increasingly globalized financial market. From coffee shops to hair salons and fruit markets, their importance in both developed and developing countries cannot be overstated, yet micro, small and medium enterprises (MSMEs) face numerous challenges in financing themselves around the world, including a finance gap.

In the Middle East and North Africa (MENA), one of the regions in the world where SMEs receive the least loans from banks, the current financial infrastructure and poor financial reporting standards limit small enterprises’ access to financing.

The Importance of SMEs

Small businesses account for 90% of businesses worldwide. About 40% of the gross domestic products (GDP) of emerging economies can be attributed to small businesses, a measure which does not include those in the informal economy.

Small businesses also create jobs, with half of emerging countries’ total employment being within small firms. In the Middle East and North Africa region, SMEs represent 96% of formal companies. 

Assuring their financial health is assuring the well-being of communities and of the region at large. 

Besides greatly contributing to economic development, small and medium-sized enterprises strengthen the communities they are a part of. A community in which diverse small businesses are able to flourish is able to improve upon itself, for instance by expanding its local tax base – the funds of which are reinvested in the community – or by creating opportunities for local actors. Innovation and entrepreneurship are stimulated by the cohabitation of SMEs, who are able to efficiently respond to the needs of their community due to the closeness of their proximity and contact.

The Finance Gap

Globally, micro, small and medium enterprises (MSME), despite being of great importance for economies and communities alike, do not have the access to finance they need. In China, for example, although MSMEs are responsible for 60% of the GDP, they receive less than 30% of total formal financing. In comparison, MENA small and medium enterprises receive only 7% of total bank lending in the region – the lowest level in the world. Private sector investment in the region, on the other hand, is the second lowest in the world.

Indeed, the financial needs of small businesses are more likely to remain unmet compared to those of large firms, as they face more obstacles to financing, putting them at a bigger risk of failure. Early-stage businesses are especially prone and vulnerable to the difficulty of accessing finance, as they lack information in regards to full operating expenses.

The finance gap represents the difference between the funds necessary for operations and growth and the funds received through external means, when funds generated by operations cannot yet cover themselves. 

Today, the global finance gap amounts to $5,7 trillion or $8 trillion when including informal businesses, who have their share of obstacles to face.

The finance gap is larger in MSMEs of the developing world, with 40% of them not having their financing needs met and up to half of formal small and medium enterprises not having access to credit according to the World Bank. The region most affected by the finance gap is the Middle East and North Africa, with as much as 88% of small businesses having unmet financial needs. 

The Role of Financial Exclusion in the Finance Gap

Overall, financial exclusion leads to lack of credit history and lack of assets to use as collateral which prevents many small business owners from accessing formal financing. In the Middle East and North Africa, only 50% of adults have a financial account, compared to 71% of the developing world. 

Lack of money, high fees and distance to financial institutions are largely responsible for financial exclusion. Although religion is not among the most cited reasons why people anywhere do not own a financial account, MENA’s unbanked are more likely than other regions' to do so.

Credit card ownership being especially low in the Middle East and both North and sub-Saharan Africa, establishing credit can be difficult. In these regions, borrowing from friends and family is significantly more common than borrowing from financial institutions. This is the case for personal loans as well as business loans small enterprises require to get started.

Low financial literacy may discourage entrepreneurs from even applying, with financial products and terms of service offered by financial institutions that can be tedious to navigate. Alternatively, SMEs may find that financial institutions lack products that are tailored to their specific needs.

Informal financial networks, including friends, family and cash-based moneylenders, are not traceable. The lack of credit history makes a potential loan to small business owners appear more risky to formal institutions. Borrowing costs and collateral requirements are high in such situations. 

On the other hand, larger, established companies are seen as lower-risk borrowers. They are able to grow further and to continue to expand their operations while numerous small businesses fail to thrive.

Consequences of Financial Exclusion on Small Business Owners

SME owners who are unable to secure loans through formal financial products rely on personal savings or investments from friends and family to finance their business. This practice is risky as they tie their personal financial health to that of their business. 

Failure for their business to thrive can have severe financial and socio-economic impacts on their lives even beyond employment and income loss, like the loss of personal savings in addition to the psychological toll linked to being financially excluded.

As a significant portion of low-income countries’ small and medium enterprises borrow from friends and family, failure to pay back these loans may lead to strained relationships within social circles. Furthermore, informal loans may not be documented properly, which can lead to additional conflicts between the lender and the borrowers when the terms are not put in writing.

Even if the business succeeds, as the size of formal loans is usually larger than the size of informal loans, especially in underprivileged communities, SMEs may lose the opportunity to grow to their full potential.

Indeed, relying exclusively on informal loans can limit its growth. Studies have found that although informal financing is linked with sales growth in Chinese SMEs, a transition towards formal financing is associated with improved economic growth. 

This suggests a balance between the forms of loans a small enterprise uses is most efficient.

The Role of Financial Technology in Bridging This Gap

Financial technology has the opportunity to fill in the financing gap by complementing the bank credit supply or by opening new channels for SME financing. Fintech could reduce the constraints on SME bank lending and improve accessibility for both underserved small enterprises and individuals. 

While only 50% of adults in the MENA region had a bank account, 76% of them enjoy smartphone connection, a number which is projected to grow to 92% by 2030. There is an immense opportunity for accessibility in these figures.

EZO

Where distance, high fees and convoluted platforms prevent people and small and medium enterprises from accessing formal finance, EZO is committed to financial inclusion. Our one-in-all financial solution is versatile and aims to serve both individuals and businesses on a global level.

EZO Business in particular will be tailored to fit the needs of businesses of every size, with easy onboarding and infrastructure for both in-person and online payments, including Point of Sale (PoS) software. With additional features like bill payment and inventory management, EZO will not only be a bridge to formal financing for the unbanked, it will also be a tool for growth and success.

EZO Earn and EZO Pay will also provide interesting opportunities for investment by eventually allowing users to join the stock market with as little as 15$. Investing and transferring money in any currency, thanks to EZO Swap, will never have been easier.

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