Financial inclusion is a pivotal concept in the evolving financial landscape. The term refers to the process of ensuring that vulnerable demographics gain access to financial services, as well as including the provision of timely and adequate credit at an affordable cost from mainstream institutions. A significant component of the financial inclusion paradigm is microfinance, which allows vulnerable segments to stabilise their income, save for future needs and navigate times of crisis. This is particularly beneficial for low-income households, rural women and small businesses, aiding in breaking down financial barriers and enabling greater prosperity and resilience in times of need.
Institutions that offer microfinance can provide funds to low-income borrowers, empower women-led micro-businesses, facilitate access to education for women, assist in post-conflict community rebuilding, leverage microfinance to aid businesses outside major urban centres and nurture small businesses.
Social Banking
Financial inclusion and social banking are two deeply intertwined concepts. While social banking initially referred to a shift to a more direct relationship between a lender and borrower without a defined goal of positive social impact, in developing countries, the term has evolved to mean subsidised government or development banking, often associated with microfinance or microcredit. The term has taken on a socially oriented meaning, implying a positive social impact. In this context, social banks specialise in providing financial services that foster social and sustainable benefits for individuals and organisations. Based on principles of sustainability, inclusivity, transparency and resilience, social banks operate in societies and communities, supporting entities and helping them reap the benefits of their social and economic activities.
Small and medium-sized enterprises (SMEs), including household-based micro-businesses, are key recipients of social banking, since they often lack access to formal credit channels, with credit and access to finance predominantly geared towards large corporations. Challenges such as asymmetric information, lack of collateral and creditworthiness issues contribute to the difficulties these enterprises face in securing necessary finance for growth.
In 2022 the International Finance Corporation estimated that around 43% of formal SMEs in developing countries had an unmet financing need, totalling nearly $4.1trn. Specifically, within the GCC, SME lending stood at 3% as a proportion of total lending, with an estimated credit gap of $250bn in the region’s SME segment.
Grassroots Financing
According to the Financial Sector Development Programme (FSDP), one of the Vision Realisation Programmes under Vision 2030, the Kingdom’s financial services sector has significant potential for improvement, particularly in terms of financing SMEs and increasing mortgage penetration through banks. Vision 2030 aims to increase the GDP contribution of SMEs to 35%, up from around 20% in 2022. To further enhance the ambitions of inclusivity in financial services, Saudi Arabia is committed to increasing the share of SME financing in bank portfolios from 7.7% as of the fourth quarter of 2022 to 20% by 2030.
Social Development Bank (SDB), established in 1971, plays a key role in the Kingdom’s efforts to improve financial inclusion through microfinance and non-financial services. As part of the National Development Fund, the SDB’s primary objective is to enhance and foster the financial independence of the lowest-income individuals and families. Under the FSDP, the SDB is tasked with developing tailored products for low-income segments and increasing savings levels among these demographics by designing, developing and launching savings products linked to social lending.
“Our most recent transition was in 2017 when we transformed from a credit bank to a social development bank. In addition to providing a financial safety net for individuals and families, the SDB promotes and aids community development at the grassroots level, offers financial assistance to small and micro-businesses, and supports start-ups,” Muied Al Bishi, vice-president, strategy and innovation of SDB, told OBG.
As of 2021 the SDB has served more than 2.7m citizens, providing roughly SR120bn ($32bn) to some 180,000 projects. During the first quarter of 2023 the SDB offered financing to approximately 9000 individuals, freelance beneficiaries, and small and emerging enterprises, with values amounting to SR454m ($121m), SR1.5bn ($399.9m) and SR1.1bn ($293.3m), respectively.
SDB lending to individuals primarily aims to improve their social and economic conditions through six key programmes: family loan; marriage loan; restoration loan (facility for house rebuilding or renovation); Nfath (freelance support facility for unemployed or low-income citizens to facilitate autonomous economic activity); Kanaf product (for widows and divorced women); and Zood saving product (a simplified savings plan).
With regards to businesses, SDB offers 11 facilities tailored to specific phases of business development. For example, the business incubators and accelerators product finances small-scale projects ranging from SR300,000 ($80,000) to SR8m ($2.1m), fostering the growth of these enterprises from inception to expansion. Product specificity also reflects adaptation to various levels of complexity in business activity. For example, while the emerging technologies product focuses on innovative digital enterprises requiring a minimum investment of SR300,000 ($80,000), the franchise programme helps citizens invest in business activities with high success rates, and the mobile vending food trucks product supports the acquisition of such vehicles up to SR250,000 ($66,600).
SDB also collaborates with established companies such as SABIC, the government-owned petrochemicals giant, and other public entities, such as the Saudi Authority for Industrial Cities and Technology Zones (MODON), in developing and implementing financial support solutions for SMEs. Respectively, these partnerships enhance the support available to start-ups and micro-sized enterprises to benefit from Nusaned, SABIC’s key initiative to support the Kingdom’s local content goals. Nusaned also encourages young Saudi entrepreneurs to venture into industrial businesses in MODON’s various industrial cities.
SDB also extends support to charitable organisations by applying a grassroots approach to beneficiary identification and fund application management. This has elevated the profile of charitable organisations and facilitated their transition to broader and more sustainable developmental work.
Financial support is most effective when combined with measures to technically and administratively upgrade micro-businesses and SMEs. “SDB actively supports start-ups and micro-businesses, aiding them in their transition from home-based operations to formally registered commercial entities,” Sultan Al Hamidi, vice-president of business at SDB, told OBG. “Additionally, SDB guides them throughout their business development journey, from conceptualisation to expansion, and offers training and mentoring to ensure small businesses have the necessary skills and knowledge to thrive,” he added.
Technology for Inclusion
A significant barrier to financial inclusion is the presence of high transaction fees in banking, which can deter the use of banking services for savings or borrowing. Reducing transaction costs is a critical step towards promoting financial inclusion, as it would enable a larger number of individuals and businesses to reap its benefits. Fintech presents a promising solution, including in expanding the adoption of microfinance. “We have seen the benefits of digital services, both in terms of operational efficiency and customer satisfaction, and we intend to continue investing in this area,” Al Bishi told OBG.
Beyond facilitating microfinance flows, technology can enhance the financial performance of individual beneficiaries. This has led the SDB to adopt a proactive approach in incorporating financial upskilling into its services. “While the speed and convenience offered by digital financial solutions are especially beneficial for small businesses, we are also working on addressing the various challenges faced by these businesses in adopting technology,” Al Hamidi told OBG. “The bank is providing solutions to help businesses manage their cash flow effectively,” he added.
Future Prospects
While institutions such as SDB are setting the course towards a more inclusive financial environment in the Kingdom, there are areas for further development and improvement. The diverse range of targeted financial programmes and the proactive approach to integrating technology are vital, but they represent only a part of the larger ecosystem necessary to fully break down barriers to finance.
SME funding platforms, movable asset pledge registries and fintech innovation could complement traditional SME financing efforts, and when combined with a focus on inclusivity, resilience and technological adaptation, could pave the way for a more empowered society and sustained economic growth and stability.
