Mar 15 2012
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Some 11m SMEs in Middle East offer $15b opportunity for banks
There is a massive $15-billion opportunity for banks in the Middle East's SME sector over the next five years, according to McKinsey & Co.
The global research consultancy says the time is right for global banks to home in on the SME sector in emerging markets which are on the verge of explosive growth.
The opportunity is clear for banks seeking new prospects: McKinsey data shows that up to 9-11 million SMEs in the Middle East, or roughly 41-50 percent, are unserved or underserved by banks.
The regional SME space is part of a greater opportunity in emerging markets led by East Asia, which is expected to grow at 20 percent per annum from $62 billion in 2010 to $167-billion by 2015.
Overall, the emerging market's SME sector is set to expand from $150-billion in 2010 to $366 billion.
Middle East will slightly underperform global markets, growing at 14 percent per annum, but will still more than double from $6 billion in 2010 to $15 billion.
McKinsey noted there are three clear reasons for banks to pay attention to SMEs now:
- First, close to 60 percent of global banking revenue growth over the next decade will be in emerging markets.
- Second, banks are increasingly focused on emerging markets and finding ways to overcome the challenges of serving SMEs.
- Third, technological breakthroughs, risk assessment and business models are facilitating growth and making such projects viable. "It is not just banks in emerging markets that should grab the opportunity," says McKinsey in a report.
"Western banks will find innovative practices that they can use to refresh and adapt their traditional banking models back home."
McKinsey believed that the challenges that obstructed growth - such as low revenue per client, high risk of credit losses and the need for a physical presence to lend to MSMEs - are no longer the obstacles they used to be.
"Revenue growth should therefore be profitable. Our research revealed that a few leading emerging market banks are making returns on equity (ROE) of over 30 percent in the MSME segment, and many others are earning 20-30 percent," McKinsey estimated.
To understand how best to approach their chosen markets, four emerging country archetypes will inform how banks behave: "game changers", "creative credits", "fortunately flexible" and "leapfroggers".
The UAE and Saudi Arabia are part of the "creative credit" group of countries that have good distribution but low credit bureau coverage.
"Creative credit" countries typically have good distribution but sparse credit bureau coverage. This group has relatively few countries and includes Turkey, the UAE, Chile and Saudi Arabia. Banks operating in these countries must pay extra attention to risk management because of the lack of information, McKinsey notes.
Egypt, Morocco, meanwhile fall under the 'game changers' group of countries that present distribution and risk management challenges.
Kuwait falls somewhere in between both the two categories.
However, further dissecting the emerging markets, the UAE, Saudi Arabia, Qatar and Morocco were in the 'cool zone', suggesting sluggish growth.
"Markets in the "cool" zone... are increasing financial penetration at less than 1.0 per cent per annum...
Domestic banks can pursue profitable MSME niches within "cool" countries, and multinational banks can approach these markets opportunistically as part of a broader portfolio of markets weighted towards red hot and warm countries," McKinsey said.
Egypt is the sole Mideast country in the "warm zone", suggesting it is achieving a moderate growth in financial penetration of 1.0-2.0 percent per annum but still represent an exciting opportunity.
Not surprisingly, Brazil, Russia, India, China - the BRICs - apart from Turkey, South Africa and Indonesia, were in the 'red hot' zone.
However, Middle East states do well in mobile phone and retail coverage which may give them an advantage especially as banks are considering partnering with telcos and retail operators to access SMEs.
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