SMES: ACCESS TO FINANCE AND RESILIENCE
This article was authored by our very own summer intern Najeeb Fakhoury during his stay with Robu in August 2018.
Several sources and publications point to SMEs and Informal Enterprises contributing close to 60% of GDP and 70% of employment within the MENA region. The importance of this segment of companies within regional economies cannot be overstated.
In Jordan, around 90% of enterprises are considered micro in size, and contribute to 24% of GDP and 60% of overall employment. Adding small enterprises, the total share of MSMEs goes up to 96% of total enterprises in Jordan. SMEs continue to face growth obstacles due to a number of critical challenges, most notable of which are: access to finance, poor reporting practices, tough business environment, and a lack of skilled labor.
Access to finance continues to be one of the main challenges hindering growth and development. According to a survey by the World Bank, 48.7% of small enterprises and 33.1% of medium enterprises in Jordan consider access to finance to be a major limitation. The main reason behind restricted access to funds is a risk-averse banking sector. The majority of credit is extended to large enterprises, given that “more than 80% of loans require collateral with an average value of just over twice the loan amount (World Bank Group).” Most SMEs are asset-light, making them ineligible for bank loans. The struggle is real as only 1 in 8 small enterprises, and 1 in 4 medium enterprises obtain a bank loan or a line of credit.
Several development institutions and publications point out that the best response to most business challenges is to have solid business planning practices. A dynamic business plansets a roadmap for the company's journey, and ensures that CEOs have clear guidelines along the way. It also helps set goals based on identified time limits and ensures that companies are kept accountable. Most importantly, regular business planning improves credibility, shows reliability, commitment and a clear path, which improves the chances of securing both equity and debt financing. Finally, making a regular habit of financial planning helps address future business challenges, and enables SMEs to think of the hard questions that need to be answered to overcome future challenges.