FIN500 – Principles of Finance

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MSMEs around the world plays a vital role in supporting the economic development & growth as well as driving the job market.

Since early 1960s, KSA Leadership has paid the attention in providing support and financing for MSMEs in deferent ways such as Agricultural Development Fund has been providing loans & support for the farmers since 1962, Saudi Development Bank and Saudi Industrial Development Fund has been supporting manufacturing enterprises since 1974.

On the other hand, number of other entities have also emerged to provide financial support, training and advisory to MSMEs, such as Abdullatif Jamil in the private sector and SABIC and Aramco from the public sector.

In general, KSA Leadership has introduced previously absent sectors into the economy, which will not only help economic diversification efforts, but also provide sizable opportunities for entrepreneurs.

According to the data published by KSA General Authority for Statistics (Stats.Gov.Sa, 2022), there are 950K MSMEs registered for business purposes in the kingdom and those have been provided over one million job opportunities for Saudi’s.

Current contribution from MSME for the kingdom’s GDP is in the rage of 20% (SAR 484Bln) while it is expected to be increased to 35% (SAR 2.1 Trln), which is one of the key objectives outlined in the Saudi Vision 2030.

Accordingly, in line with vision target, number of reforms and initiatives have been instigated to support the growth of MSMEs in the kingdom.

From government point of view, adequate measures has been taken to support MSMEs such as establishing the “Small and Medium Enterprises General Authority” (Monsha’at), Digitalization and simplified the government procedures needed to start a business (Meras Platform), Reimbursing the government fees, Indirect funding in order to provide low cost loans to MSMEs, Raising the capital of Kafalah, Support and initiate Saudi Venture Capital (Jada Investment)- Private equity association and launched funding portal to link financing institutions with start-ups and MSMEs etc.

Under a new initiative, all government procedures needed to start a business are planned to be expedited through the “Meras” platform. The slogan for Meras initiative is “No need to go further ” which clearly shows how the program gives business owners a short-cut to establish a business. Instead of visiting each ministry and government office, with Meras, you get your registration completed in one place and online.

Further, the Saudi Central Bank (SAMA), has also played a role in aiding the growth of MSME, through measures such as extension of guaranteed financing program for another year till 2023, while encouraging the banks to focus more on MSME sector portfolio growth. Below are some statistics of MSME Loan share in total loans in the kingdom (Sama.gov.sa, 2022).
– As of Q1-2018, MSME loan portfolio share in total loans stood as 6.8%

– In Q1-2019 it’s gradually increased to 7.7%

– In Q1-2020 it’s further increased to 8.3%

– As of Q1-2021 it has significantly increase to 10%

– And the increased continues in Q1-2022 up to 10.1%

MSME Struggle to access adequate funding from Financial Institutions:
According to the data published by KSA General Authority for Statistics (Stats.Gov.Sa, 2022), major obstacles to starting a business in the Kingdom are;

1. High Electricity Tariffs

2. Strict Government regulations & lengthy licenses process

3. Difficulty in identifying & recruiting resources with necessary experience & qualifications

4. Struggle to access adequate funding from financial institutions

Struggle to access adequate funding from financial institutions is a key challenge MSMEs are facing.

A study by the IMF found that more than 50 percent of firms in MENA do not have access to credit, and 30 percent of these firms identify lack of access as a major constraint (IMF.Org, 2019). Several reports by the IMF and the World Economic Forum (WEF) argue that SMEs face such obstacles in borrowing because banks are reluctant to lend as they find these enterprises small, less diversified, and have weaker financial structures, resulting in higher borrowing risks (WEForum.Org, 2022).
Meanwhile, these reports find that financing alternatives outside the banking sector are limited, and other non-bank financial institutions such as microfinance institutions, leasing companies, private equity or venture capital firms are underdeveloped in the region.

Two Recommendations to effectively address the issue and align with Saudi Vison 2030:
Following key solutions are recommended in order to address the issue of the struggle MSMEs are facing with regards to inadequacy & inaccessibility of funding from financial institutions.
1. Improving the MSMEs financing ecosystem, through innovative financing solutions specifically targeting MSMEs.
In line with vision 2030, government has implemented a fintech solution named as “Funding Gate” which was designed by Monsha’at, in order to simplifies and speeds up the delivery of funding for MSMEs. Platform act as a market place where all the lending agencies and borrowers could meet each other, analyze the requirements and capture the opportunity based on each lender’s risk appetite. This has already assisted over 2,772 enterprises as of Q1 2022 and has resulted in the reduction of the average funding disbursement time from 86 days in December 2020 to just 7 days in December 2021, a 757% improvement (Monshaat.gov.sa, 2022).
The key aspect of this platform is that it ensures the funding need is only for MSME segment and it interact with MSMEs in a completely digital way, from application, onboarding, monitoring, until fund disbursement. These convenient and instant services not only strengthen the digital connection between the financial institution and the MSMEs but also bring digital intelligence to these industry segment.

Now that the platform is available to both lender & borrower, it is critical for the lenders to be innovative in providing suitable & more diversified financing products specifically targeting MSMEs.

2. Communicating MSME lending targets to Banks and Non-Banking financial institutions as a regulatory requirement.
As the financing sector regulatory body in the kingdom, Saudi Central Bank (SAMA) has identified the reluctance of the Bank’s & NBFI’s in financing MSMEs due to the various inherent risk factors. However, in line with Vision 2030, SAMA has implemented new regulatory requirements for all the banks to report their financing to MSMEs on monthly basis through which they are closely monitoring the progress of the loan book increase in MSME sector. This initiative has shown to be fruitful as the MSME Loan share in total loans in the kingdom has continuously in increasing trend (6.8% in Q1-2018 to 10.1% in Q2-2022) and all the banks has implemented their own strategy targeting MSME portfolio growth.

As these reforms begin to take shape, and the business environment for MSMEs improves, we expect to see the overall contribution of MSMEs to rise in the local economy over time, even prior to what has been targeted in vision 2030.

References:
http://www.stats.gov.sa/
https://www.sama.gov.sa/en-US/EconomicReports/Fina…
https://www.imf.org/-/media/Files/Publications/DP/…
https://www.weforum.org/agenda/2022/08/why-we-shou…
https://monshaat.gov.sa/sites/default/files/2022-0…