Providing support: Expanding financing for smaller businesses is crucial for growth

Small and medium-sized enterprises (SMEs) account for the great majority of Jordanian businesses and industry, as well as for a large share of national eco-nomic output. However, as in many developing coun-tries, the segment faces a number of significant challenges, not least the ability to raise financing for projects, which is an issue for industry as a whole, but especially for small firms.

In addition to several long-standing programmes, a number of organisations have recently launched initiatives that have been designed to provide assis-tance to SMEs. Local and international institutions are also planning to work together on the develop-ment of a national SME strategy.

CHALLENGES: Smaller businesses in Jordan are a cru-cial part of the economy, especially as regards job pro-vision; according to a Jordan Chamber of Industry (JCI) presentation from 2010, SMEs and micro-businesses account for around 40% of GDP and 70% of employ-ment in Jordan, making the development of the seg-ment crucial to tackling unemployment.

However, the segment currently faces a number of hurdles, such as difficulties in obtaining support and advice. “There is a gap in terms of technical support for SMEs,” Maher Al Mahrouq, the director-general of the JCI, told OBG. Access to credit is difficult as well; while financing can be hard to come by for industry in general (see overview), the issue is particularly acute for SMEs. “SMEs do not have access to finance and if they do it is expensive,” Al Mahrouq told OBG. He went on to add that only around 14% of total credit goes to the segment. “Most industrial credit goes to the 50 largest firms. Banks are unwilling to lend to SMEs because they view them as risky and have alternative borrowers, such as the government.”

SME-specific banking is also in need of conceptual growth in the kingdom. “Commercial banks are either focused on the corporate or retail markets. We have not been able to raise awareness of SME banking, which is a different industry from the others,” Al Mahrouq told OBG. Small firms’ lack of collateral also plays into the problem with some industry figures complaining that banks’ requirements in this area are excessive.

“A major problem for SMEs is a lack of collateral and a lack of financing history,” Saleem Nabulsi, the busi-ness development manager at Chemical Supplies and Services Company, told OBG. “If you are a new compa-ny starting in Jordan, the biggest problem you will have is finance,” Nabulsi added.

LONG-TERM LENDING: In 2011 the president of the JCI, Hatem Halawani, citing the difficulties experienced by industry and SMEs in particular in obtaining financ-ing, suggested that the country was in need of a bank focused on industrial development and also able to provide long-term credit. A previously existing bank with such a role, the Industrial Development Bank, was transformed into an Islamic bank in 2008.

However, Al Mahrouq told OBG that the organisation was not calling on the government to establish a new development bank, but rather to encourage the private sector to boost lending to the segment. “We are not asking for the creation of new banks – we realise the government cannot do that under current conditions. What we are asking it for is to create incentives for banks to provide long-term financing to SMEs,” he said, sug-gesting, for example, reserve ratio privileges for banks lending to the segment, similar to a scheme undertak-en by the Central Bank of Egypt.

TECHNICAL SUPPORT: Efforts to tackle these chal-lenges have been under way for some time. For exam-ple, the Jordan Enterprise Development Corporation (JEDCO) runs an initiative funded by the EU called the Jordan Upgrading and Modernisation Programme, which provides grants aimed at boosting the competitive-ness of Jordanian microbusinesses and SMEs at home and abroad by encouraging the adoption of best prac-tices and enhancing productivity. The programme began in 2004; its second phase, which has been running since 2010, has so far provided more than €11.65m of support to 731 projects, out of a total budget of €15m.

One example of a new initiative aimed at helping SMEs was the JCI’s opening of a technical support unit for SMEs in April 2012. The chamber is working on the proj-ect together with the International Labour Organisa-tion, which is undertaking an assessment on how to best create an environment that will enable SME growth.

BOOSTING FINANCE: Efforts also include several ini-tiatives focusing on expanding the availability of finance in particular. One step was the launch in August 2012 of a new loan guarantee fund by the Ministry of Plan-ning and International Cooperation and the Jordan Loan Guarantee Corporation (JLGC), which will support SMEs applying for credit from the Development and Employ-ment Fund. Under this scheme, the JLGC will guaran-tee up to 70% of loans taken by firms participating in the scheme. The JGLC provides SMEs with guarantees for loans of up to JD100,000 ($140,650) with a maxi-mum term of 72 months and JD15,000 ($21,100) with a maximum term of 36 months for microbusinesses. Foreign donors and international organisations are also working to help increase access to lending. NGO Glob-al Communities (formerly called CHF International) operates an initiative called the Jordan Loan Guaran-tee Facility, which guarantees up to 70% of loans from commercial banks to SMEs and gives banks technical support to improve their capacity for SME lending. The project, which was launched in January 2012, is sup-ported by $250m of funding from USAID and the US’s Overseas Private Investment Corporation.

SUPPORT: Loans under the scheme range from between $25,000 and $1m, and can have terms of up to 10 years, with interest rates capped at 5%. At least four local banks have joined the initiative, namely Ahli Bank, Arab Bank, Cairo Amman Bank, and the Hous-ing Bank for Trade and Finance. NGO Global Commu-nities also runs a USAID-funded programme called the Middle East Micro Credit Company, providing loans to low-income families, SMEs and micro-businesses. In June 2012 the organisation ran a three-day workshop aimed at female owners of SMEs seeking financing, while in August, USAID and the Foundation for Inter-national Community Assistance agreed to develop a project to provide loans and support to disadvan-taged young people. Meanwhile, in October 2011 JED-CO and the European Investment Bank announced the launch of a $50m venture capital fund specifically for SMEs in the kingdom, managed by Abraaj Capital.

LEARNING FROM OTHERS: Efforts are being made to increase communication and cooperation with SMEs in other countries. Boosting cooperation between small businesses in the two countries is an element of the 2009 Jordan-Turkey free trade agreement (see overview), and in December 2012 JEDCO signed an agreement with the Turkish Small and Medium Enter-prises Development Organisation to increase commu-nication and the sharing of expertise between the two. JEDCO also signed a memorandum of understanding with the Slovakian National Agency for Development of SMEs in October 2012 to focus on exchanging infor-mation and promoting entrepreneurship through the development of policies, services to SMEs and events.

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