Microenterprises sidelined in MENA SME Islamic banking report

Bank financing plays a key role in many businesses expansions that lead to rising employment needed to help create the millions of jobs to cash in on the demographic dividend in the MENA region. As the past decade has shown in countries with governments supportive of Islamic banks, the sharia-compliant financial sector can play a role alongside conventional banks.

The International Finance Corporation (IFC), the private sector arm of the World Bank, released a study about the potential for sharia-compliant SME bank financing in 9 countries in the MENA and South Asia (MENASA) region – Egypt, Iraq, Jordan, Lebanon, Morocco, Pakistan, Saudi Arabia, Tunisia and Yemen. One of the major themes in the study was the idea that SMEs rather than microenterprises, and particular SMEs in capital intensive sectors, should be the primary focus for Islamic banks.

The challenge with this focus is that it ignores a much bigger share of companies that employ a large number of people in the MENASA region because not all SMEs are in capital intensive sectors and the threshold for small enterprises is relatively high in many countries. The study provided a detailed ‘to do’ list for governments and banks in each country to open up financing for SMEs, but it puzzlingly reflects an unfriendly attitude towards microenterprises and the sectors in which they account for a large share.

The opening section of the report’s executive summary states that “very small enterprises […] generally operate in the trade and commerce sectors, which have low economic potential, as they serve local markets and do not add significant value to final products”. This is in contrast to the description of SMEs which “operate in high economic impact sectors such as manufacturing and construction”.

Capital intensive SMEs ‘more value added’ than microenterprises

On its face is the idea that businesses that are more capital intensive and generate more value added will benefit an economy, particularly if the markets in which they compete are made more inclusive by allowing SMEs to access markets where large firms have dominated. It also reflects an attitude that by encouraging a country to move up the value chain and focus on export-led growth SMEs can more successfully develop, to the benefit of its population. These are certainly examples where the oil importing countries in particular can benefit from greater development of their export sectors but the bias towards these sectors seems disproportionate to their importance in employment creation. Other countries with large oil exporting capacity will face challenges developing export-facing businesses because their oil exports, as in the cases of Iraq and Saudi Arabia, can make their other exporters uncompetitive.

Continue reading the analysis on the IFG Briefing to know more about Conventional v Islamic financing considerations, the Report recommendations and the Non-financing opportunities.

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