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Middle East banks urged to back SMEs

The World Bank has warned that credit concentration in the Middle East is the highest in the world and says the fact that small and medium-sized businesses are being neglected is greatly harming employment prospects.

In its Financial Access and Stability review published on Thursday, the Bank warns that banking systems in the Middle East and north Africa, while large compared with other emerging markets and having survived the global financial meltdown relatively well, are undeveloped.

Only 2 per cent of Gulf Co-operation Council banks' loans is lent to SMEs, the study says. Existing institutions prefer well-known credits and governments to more risky alternatives.

"The good news is that Mena has a big banking system and the banks are well capitalised. They have dealt well with the global financial crisis ... but that is the end of the good news," says Roberto Rocha, lead author of the report.

"Mena has a large banking system but it does not cater to the needs of the population," Mr Rocha says. "Many households, many small businesses do not have access to the financial system and this explains Mena's relatively low growth and high unemployment."

The Arab world suffers from the highest youth unemployment in the world at more than 25 per cent, according to a study published this year by the International Finance Corporation .

The region's labour force participation rates are among the lowest globally, standing at about 35 per cent, compared with the global average of 52 per cent, the study found. If the Arab world wishes to achieve the global unemployment rate at the global average workforce participation level, it needs to create more than 85m jobs during the next 10 years.

SMEs are widely recognised as the vehicles for generating jobs but the World Bank says only 20 per cent of them in the region have a loan or line of credit, a significantly lower proportion than in all other regions of the world except Africa.

The World Bank report was commissioned two years ago after an earlier study identified problems in the Middle East and north Africa of privilege and an absence of competition.

The Bank's banking regulation service says applications for new banking licences in the region have mostly been rejected over the past 10 years. The study warns that there is typically no regime for large exposures, and non-bank financial institutions provide little in the way of competition.

Written in partnership with the Islamic Development Bank, the Arab Monetary Fund, the Union of Arab Banks and the Union of Arab Stock Exchanges, the Financial Access and Stability review finds that while equity markets look big, they are dominated by two sectors - finance and infrastructure. Services and industrials are only minor players.

Stock markets also flatter to deceive in another way. Free floats need to be increased in a number of markets, and companies that are not traded should be delisted, the study says.

There are some sizeable public-sector pension funds, but the report says the accumulations are largely the result of youthful populations. Moreover, the generosity of many public-sector pension funds has stifled the growth of private pension fund assets and limited the accumulation of voluntary contributions, the study argues.

Mr Rocha warns that the events of the past nine months are in part grounded in economic frustrations, and urges regional governments to act and to innovate.

"The risks are that [if governments do not act to liberalise] you continue to breed discontent and frustration. This is a recipe for social discontent. You look at that demographic profile and you see more unrest coming," he says.

© Financial Times 2011