Saudi Monshaats new bank will help bridge financing gap for SMEs

The Small and Medium Enterprises Bank aims to bridge the financing gap for the Kingdoms small business owners and develop innovative new financing solutions for this critical sector.

The bank was launched last month by the General Authority for Small and Medium Enterprises (Monshaat) under the Saudi National Development Fund. The establishment of the bank was based on a benchmarking study of 14 countries, which examined the best practices for supporting funding for SMEs, along with analyzing the current situation and identifying financing gaps.

The launch of the bank is an integral part of the national SMEs strategy, initiated by Monshaat to build a competitive economic system that ensures the sustainability and prosperity of the sector and helps boost its contribution to the Kingdoms gross domestic product (GDP). The strategy includes 16 basic and nine pivotal initiatives, one of which was the establishment of the bank.

SMEs faced many obstacles and challenges in Saudi Arabia before Monshaat was established in 2016. Such hurdles hindered their ability to grow and limited the sectors contribution to the Kingdoms GDP.

Among the difficulties SMEs faced in the past was the inability to obtain financing with a reasonable interest rate and affordable collateral. The share of financing provided by local banks was only 2 percent of the total lending in 2016.

Realizing such difficulties, the Saudi government implemented a number of programs and initiatives to encourage financial institutions (banks and financing companies) to lend to SMEs.

The Kafalah program, which aimed to encourage financial institutions to provide financing to SMEs, was one of these initiatives. These programs and initiatives have resulted in an increase in financing provided to SMEs by local banks and financing companies to SR176.2 billion ($47 billion) in Q3 2020, 8.3 percent of the total lending.

The Kingdoms Vision 2030 has emphasized the importance of SMEs to Saudi economic growth, since they create jobs, support innovation and boost exports. The Vision 2030 stated that the SMEs in the Kingdom are not yet a major contributor to its GDP, especially when compared to advanced economies. For example, in the Euro area SMEs account for 99.8 percent of total business enterprises, provide 60 percent of the value added, and 70 percent of total employment.

In my opinion, the establishment of a specialized bank in Saudi Arabia to provide financing to SMEs will overcome the financing obstacles facing such companies. Also, it will enhance the role of SMEs in the economy, especially when considering job creation for Saudi nationals and the Saudi governments aim to reduce the unemployment rate in the Kingdom of 14.9 percent in Q3 2020.

Finally, I believe that creating such a bank, along with other initiatives taken by the government, will help to increase the contribution of SMEs to the Kingdoms GDP from 20 percent to 35 percent by 2030.

Talat Zaki Hafiz is an economist, financial analyst and a board member of the Saudi Financial Association. Twitter: @TalatHafiz