With small and medium-sized enterprises (SMEs) accounting for 98% of all businesses in the king-dom, according to the Jordan Enterprise Development Corporation (JEDCO), this sector should be of major interest to the country’s banks. Yet historically, SMEs have accounted for a relatively small amount of banking business, as lenders have concentrated on retail and larger corporate commercial activities. Now that could be changing, as a combination of gov-ernment initiatives and banking business expansion brings this vital market segment into the spotlight. The Ministry of Trade and Industry categorises SMEs as businesses with fewer than 250 employees and capital investment of JD30,000 ($42,200) or less. It further subdivides the category into micro-enterprises (which have fewer than 10 employees); small enterprises (those with fewer than 50 employ-ees); and medium enterprises (those with 50 to 249 employees). According to this calculation, two-thirds of Jordan’s SMEs fall into the “micro” or “small” cat-egory, as they have fewer than 50 employees.
RECENT EFFECTS: The number of SMEs may be growing, too, particularly with the influx of refugees from Syria who are now setting up shop, although other reasons, such as a more optimistic business mood among Jordanians, may also be behind this. “So many SMEs are being set up here,” Muhannad L Attar, the director-general of the Amman Cham-ber of Commerce, told OBG. “We are definitely notic-ing that the numbers are swelling, perhaps because foreign capital is also being mixed with capital from Syrian Palestinians with Jordanian passports, and people from elsewhere. We know that Iraqis are also interested in expanding their business here, as wealth sources there come back on-stream.” Whatever their provenance may be, one of the biggest challenges that all such businesses face – whether in Jordan or elsewhere – is attracting finance. Muntaser Dawwas, CEO of Investbank, told OBG, “Many banks are still reluctant to focus on SMEs because they look at them through a corporate point of view rather than a retail-based one. Banks need to be trained to look at SMEs through the lens of portfolio risk rather than on a Western-style indi-vidual application basis.”
ISSUES AHEAD: Traditionally, extended family and friends have been the source of funds for SMEs, along with personal savings. Banks have tended to be reluctant to lend to SMEs as they require a degree of transparency and accountancy that the small business may not be used to or able to provide. A large number of unregistered economic activities tend to go through SMEs too, which business own-ers may be reluctant to formalise via the kind of reg-ularisation that a bank would require. Thus, accord-ing to a January 2012 statement from the minister for planning and international cooperation, Jafar Hassan, SMEs receive only around 10% of all the loans extended by financial institutions.
All of this adds up to a scenario in which many SMEs remain small in size, or even fail, if they do not obtain the kind of financing that can help them expand and compete, as well as enter the formal market – a necessary requirement if they are to gain access to other forms of financing, such as the stock exchange. “SMEs continue to be underserved,” Haethum Buttikhi, the assistant GM of retail bank-ing at Jordan Kuwait Bank, told OBG. “This stems from many banks lacking a true understanding of this market, and the fact that institutions such as a cred-it bureau are not yet in play.”
TAKING STEPS: To address this challenge – and thereby free up financing for the sector – the gov-ernment, via JEDCO and other institutions, has set up a series of initiatives to help bring the kingdom’s SMEs into the financial fold. There is a macroeco-nomic rationale for this agenda as well. The SME sector is worth around 50% of Jordan’s GDP, and it also provides around 60% of the economy’s jobs and 45% of the kingdom’s exports, according to the OECD.
One of the initiatives the government has launched is the Banking Window Programme (BWP), which aims to increase SMEs’ preparedness for entering the banking world, while maximising their chances of securing loans and other types of assistance. In addi-tion, the BWP is aiming to help businesses make the best possible use of existing and borrowed collat-eral in advancing their business plans.
PROVIDING GUARANTEES: Given that few banks will lend funds to SMEs without such loans being fully supported, one of the main planks of the BWP is the Loan Guarantee Scheme (LGS). The scheme is fund-ed under the Jordan Services Modernisation Pro-gramme, which itself is co-funded by the EU and the Jordanian government. Under the LGS, both medi-um- and long-term loans from commercial banks to SMEs are either fully or partially guaranteed, sub-ject to bank and LGS approval.
The scheme is clearly growing in popularity. “The value of the loans we guaranteed in 2012 was three times that of 2011,” said Mohammad Al Jafari, the director-general of the Jordan Loan Guarantee Cor-poration (JLGC), which manages the scheme. “It is working well. SME non-performing loan (NPL) ratios are generally below corporate levels and both the probability of default and scale of loss are lower. From a macroeconomic perspective too, SMEs are critically important, as a dinar goes a lot further for an SME than for a corporate.”
The JLGC can guarantee a maximum loan of JD100,000 ($141,000) for SMEs, or JD15,000 ($21,100) for a micro-enterprise. Maximum repay-ment periods vary from 72 months for SMEs to 36 months for micros, while the guarantee can cover up to 70% of the outstanding loan. Any SME or micro-enterprise seeking a loan guarantee must first sub-mit its application to the JLGC, which assesses it before passing on a recommendation to a commer-cial bank to issue the loan or decline the applica-tion. In this, the JLGC is assisted by the existence of its own credit bureau. The corporation has a data-base extending back to 1994, placing it well ahead of many institutional lenders in the kingdom.
INTERNATIONAL SUPPORT: In addition, a number of multilateral institutions have long been support-ing the development of SMEs in Jordan, including USAID and the US-based Overseas Private Invest-ment Corporation, as well as the European Bank for Reconstruction and Development.
This SME assistance strategy is not new – the JLGC was established in 1994 – but nowadays, it is not just the government that wishes to promote SME financing, but also the banks themselves. “SMEs will be the sector target for 2013,” Nadim Abaouat, the general manager of Société Générale de Banque Jordanie, told OBG. “They pay good rates and are a virgin market in comparison to corporate and retail.”
Partly, this refocusing is the result of other trends in the banking and macroeconomic sphere. Banks have become increasingly reluctant in recent years to extend credit for stock market activities, while they also see slow corporate banking growth on the back of the economic downturn. While project financing may in the future be a major avenue, for now, there is little new in that field either. Retail growth is strong, yet it lacks the potential of previous years.
At the same time, banks have been keen to improve the quality of their loans, as NPL ratios have grown. In general, SMEs represent less default risk and low-er NPL ratios. Thus, banks have been increasingly focusing on SMEs as a segment for development. Ini-tiatives such as the JLGC help here, adding an extra layer of certainty into the equation.
NEW MINDSETS: However, a greater change in men-tality may also be necessary if the SME financing package is to achieve wider success. “Usually with SMEs granting the loan is fine, but it is the imple-mentation that is often the problem,” Zein Malhas, the corporate finance officer with the Housing Bank for Trade and Finance (HBTF), told OBG. HBTF and Arab Bank have been working closely with the JLGC in implementing the LGS. Both have established their own SME departments, and have taken a proactive stance in growing their business with them.
In the past, multilaterals also issued grants for lending to SMEs in Jordan, yet take-up was sometimes below expectations. One reason for this may have been that the culture of borrowing from banks is still far from entrenched among local SMEs.
SEEING THE CHANGE: In changing this mindset, trust may well be one of the key issues. Banks have reported a change in attitude from SMEs once trust had been established, after which time SME man-agers would be more than willing to share data and work with the bank on developing business and financial strategies. Local knowledge and expertise on the bank’s side, therefore, may well come into its own in this respect. The year ahead, then, looks set to see an increasingly strong focus on SME lending by the kingdom’s banks, with many potential bene-fits stemming from this for the economy as a whole.
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