8 banks that seem very engaged in SME lending, with shares of SME loans around one third of total loans. A similar pattern is observed in the case of private banks. Most institutions operate with low shares, but there is a sizable group that seems more engaged in the SME business. By contrast, the distribution of SME lending among state banks is more uneven.

The clustering of banks operating with low shares of SME lending could reflect a set of common obstacles such as weak financial infrastructure. The banks in the intermediate range of the distribution could be operating in countries with better enabling environments, or could be doing relationship lending with a large branch network, or could still be leading banks with more advanced SME lending technologies. These questions will be pursued further in section 5.

# _4.2. Strategic Approach to SME Banking_

In line with other surveys, most banks in MENA are already engaged in the SME sector, despite the low share of lending in many of these banks. As shown in Figure 5a, about 87 percent of banks in the GCC already have SMEs as clients, and the same percentage already has a separate unit to manage the SME business. The percentage of non-GCC banks that already has SMEs as clients is even higher at 96 percent, as shown in Figure 5a. This is expected, given the relatively higher importance of SMEs in non-GCC economies, and the higher average share of SME lending among non-GCC banks. What seems surprising is the lower share of non-GCC banks with a dedicated SME unit.

The lower share of non-GCC banks with dedicated SME units reflects to some extent the relatively low share of state banks with these units (most state banks are in the non-GCC countries). As shown in Figure 5b, although state banks are also very engaged in the SME business, only 56 percent have already set up a separate SME unit, while in the case of private banks this figure is significantly higher at 74 percent. All in all, these figures indicate that many private banks are committed to SME lending and willing to allocate internal resources to develop the SME business and reach their long-run targets for SME lending. Even in the GCC, where SME lending plays a comparatively less important role, most banks have already a dedicated SME unit presumably created to reach the proposed targets.

There are a number of common factors driving banks to engage with SMEs across regions and ownership structures. In line with the previous surveys, the most important factor mentioned by both GCC and non-GCC banks is the perceived profitability of the SME segment (Figure 6a).<sup>4</sup> Other important and inter-related factors include the saturation of the market for large corporates and the need to diversify the loan portfolio. The prospects of generating business through crossselling are rated as important or very important by a large share of GCC and non-GCC banks alike. Interestingly, government programs are rated as relatively less important, especially in the GCC. Government programs are generally more important among non-GCC banks, although a closer look at the questionnaire reveals significant differences across non-GCC countries.

> 4 In this question the banks were asked to provide an answer following a four-point scoring scale: not important, marginally important, important, and very important.  The two highest scores are reported.  The same format was used for other questions in the survey.