Claudia Perri, Regional Commercial Director for Southern EMEA at HPD LendScapeby Nabilah Annuar
“The future of Middle East economies hinges on SMEs and entrepreneurs.” It is a statement that is heard at nearly every budget announcement, at every regional conference and is a key aspect of the economic vision for ambitious markets across the Middle East.
Yet, limited access to funding has been and remains a significant barrier to SME growth in the region, as it is across the rest of the globe, despite major initiatives at government and private sector level to address the issue.
Given this backdrop, it is perhaps no surprise that asset-based financing (ABF) is now emerging as an increasingly popular alternative financing technique for SMEs and the banks that support them. Encompassing factoring, discounting, supplier finance, PO finance and other receivable and payable finance products, demand for the flexibility and low risk form of financing offered by ABF is now growing in the MENA region.
For example, there was a seven per cent increase in factoring in 2018 to $9.8 billion, which was only marginally behind the 10 per cent growth of factoring in Europe.
SMEs: The lifeblood of Middle East economies
SMEs invariably sit at the heart of Middle Eastern economies, accounting for a reported 90 per cent of businesses across the region. That is just as well when we consider the task ahead of them: as many MENA countries pivot away from economic models centred on hydrocarbons, the private sector, and SMEs in particular, are being encouraged to take centre stage.
In the UAE, the Government is targeting an increase to 60 per cent in SME contribution to GDP; in Saudi Arabia, SMEs are tasked with increasing their contribution to GDP by 15 per cent ahead of 2030; in Lebanon, Egypt and Jordan, dedicated strategies have also been formulated to drive SME growth.
Supporting SMEs is a natural priority for economies focused on sustainable growth, particularly when we consider the important economic role SMEs play in the region, currently contributing 22 per cent to the region’s GDP.
Also, the potential for SMEs in the region is significant: the SME market in the Gulf is forecast to be worth as much as $920 billion in 2023. It is unsurprising then, that creating an environment that nurtures growth for businesses and helping them to develop, thereby increasing their economic contribution, should be top of the agenda for MENA governments.
Financing constraints limiting growth
Easy access to finance is an obvious pillar of this supportive environment for growth companies that MENA governments are trying to foster. Yet, access to funding remains relatively constrained globally and SMEs in the MENA region face the largest credit gap in the world.
While banks in the region are beginning to recognise the importance of plugging this gap, SMEs only account for eight per cent of total bank lending. Many banks remain reticent to lend to young businesses without a track record and assets, while others claim to be restrained by regulatory restrictions.
Where “challenger banks” have stepped up in Western markets to tap into a rich pool of SME borrowers, MENA’s SMEs are still left wanting.
As an added difficulty, traditional sources of finance also pose timeframe challenges for SMEs, which often need quick injections of cash. Alternative finance models such as crowdfunding and peer-2-peer (P2P) lending have quickly and effectively started to address this, bridging the gap left by traditional bank loans. However, these forms of alternative finance are relatively new entrants to the world of SME financing and are still in their infancy in the Middle East.
Asset-based financing growing as a funding option
As new participants grapple with regulations across different markets in the region, asset-based financing, which provides a loan to a company secured by one of its assets, ranging from equipment to accounts receivable, is gaining ground.
ABF has a long history and in its many forms has expanded worldwide, with 2018 seeing global ABF volumes of lending against assets and invoices at approximately $3 trillion. Now, the model is gaining traction in the Middle East, with countries such as Egypt seeing 19 per cent growth in 2018 to $573 million.
Fuelled by growing demand for low risk and easily accessible working capital from the region’s many SMEs, there is a growing appetite for services such as ABF and invoice factoring.
Increased digitisation is a major driver of the growing appetite for ABF services in the region, making it increasingly accessible to MENA’s banks and businesses alike. On the one side, technology means that businesses’ accounting systems can become more and more sophisticated enabling more transparency.
Businesses are thereby more easily funded by ABF. On the other side, banks and other lenders are now able to tap into technology solutions that help them provide more cost-effective, diversified and sophisticated ABF services, increasing their access to ABF for clients. In digitally advanced economies across the Middle East, this momentum picking up around ABF in all its forms looks set to increase.
As SMEs take an even larger role in Middle Eastern economies, the entities that finance them are having to step up. With access to traditional lenders constrained, alternative finance is emerging as a critical lifeline for the region’s SMEs and ABF is beginning to establish itself as a major avenue of support.
Technology is paving the way for the increased supply of such services by lenders and, as the demand escalates for quick and flexible finance from the ever-growing MENA SME sector, ABF is poised to help more and more growing businesses unlock their potential.