On the role of banks in supporting SMEs in the Kingdom of Saudi Arabia
To what extent does the current macro backdrop translate into effective credit uptake by SMEs? Which risk-sharing tools can help convert demand into actual lending?
HOMAM HASHEM: The current macroeconomic environment in Saudi Arabia, reflected in a non-oil Purchasing Managers Index (PMI) of 58.1 in March 2025, points to a strong and expanding non-oil private sector. That momentum translates into an increase in SME demand for credit as firms look to fund growth, working capital and expansion. Third-quarter 2025 data show SME lending rising by 36% year-on-year to SR447bn ($119.2bn), indicating macro strength is increasingly feeding credit uptake.
Risk-sharing tools remain important in sustaining momentum. Credit guarantees and similar mechanisms help address lender risk concerns, particularly around smaller or newer firms, and play a key role in converting demand into consistent lending flows by improving bank confidence and credit approval rates.
What portfolio rebalancing makes sense for banks as SME credit deepens, given that loans to SMEs in the third quarter of 2025 accounted for just over 9% of total loans?
HASHEM: Although SME lending has grown, we have not yet reached the longer-term aspiration of around 20% of total loans. This suggests there is room for banks to rebalance portfolios towards SMEs as a distinct growth segment rather than relying primarily on large corporates. In practice, this means investing in dedicated SME banking capabilities, offering more tailored products and simplifying credit processes.
Guarantee programmes can help bridge the gap by reducing the risk associated with expanding into underpenetrated SME segments. By absorbing part of the credit risk, they make it easier for banks to scale SME portfolios while maintaining prudent risk management and supporting broader development of the SME credit market.
Where are the biggest financing gaps in working capital versus capital expenditure (capex) finance for smaller firms?
HASHEM: For many smaller firms, the main financing gaps relate less to demand and more to structure. In working capital, access to flexible and timely funding is often constrained by rigid credit requirements. In capex finance, the challenge is more pronounced, as many SMEs lack the fixed assets typically required as collateral, particularly in service-led or technology-driven sectors. Structured guarantees can help address both issues by enabling banks to rely less on physical collateral and more on underlying project or cash flow viability. They also support longer loan tenors for capex, which makes larger investment more affordable and better aligned with business cash generation, easing a key constraint on SME growth. Banks are finding Kafalah products are more attractive as they require less effort in terms of business processes, evaluation and maintenance.
How are rising e-payments changing banks’ view of SME cash-flow visibility, collateral needs and pricing?
HASHEM: The rapid adoption of e-payments, now used by the vast majority of SMEs, is materially improving cash-flow visibility for banks. Access to near real-time transaction data allows lenders to form a clearer, more dynamic view of business performance than the use of periodic financial statements. This is encouraging a gradual shift towards cash-flow-based lending, with potential implications for collateral requirements and pricing. However, firms with limited operating history or incomplete documentation can still fall outside traditional credit models. Risk-sharing instruments can complement digital data by covering residual uncertainties, encouraging banks to lend to thin-file businesses and bringing more enterprises into the formal financial system as their data footprints develop.
Which prudential or supervisory adjustments would most effectively encourage commercial lenders to expand SME portfolios, particularly in light of potential development-finance institution mergers?
HASHEM: From a regulatory perspective, adjustments to prudential treatment could further support SME lending. The Saudi Central Bank (SAMA) could encourage this by refining risk weightings for qualifying SME exposures, reducing capital intensity and improving the economics of SME lending for banks. Greater standardisation of SME credit assessment frameworks could also reduce costs and processing times. Looking ahead, consolidation among development finance institutions could help create a more coordinated support structure for SME finance, aligning policy tools, risk-sharing mechanisms and commercial bank participation. Experience during the Covid-19 pandemic demonstrated that targeted regulatory and policy measures introduced by SAMA can play a meaningful role in supporting credit flow, reducing financing costs and strengthening the resilience of the SME sector.
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