12 but this perception does not prevent them from engaging in the SME business, possibly reflecting their mandates to fill the SME financing gap, regardless of the associated risks.

GCC banks seem to adopt stricter selection criteria for engaging in SME lending, relative to nonGCC banks. As shown in Figure 14a, in selecting potential SMEs, a larger share of GCC banks considers specific factors such as the growth prospects of specific SME sectors, the size of their exposure to these sectors, and the existing clientele. The apparently stricter selection criteria adopted by GCC banks is consistent with the higher perception of risk in the SME business among these banks, and with the smaller volumes of SME lending as well. Interestingly, GCC banks do not target exporting SMEs, a result which can be explained by the limited number of exporting SMEs in oil economies (Figure 15c).

At the same time, the apparently lesser relevance of selection criteria among non-GCC banks disguises large differences between state and private banks. As shown in Figure 14b, a much lower share of state banks adopts selection criteria to identify and screen their clients and build up their SME portfolios than private banks. This again probably reflects the broad mandates of state banks to fill the SME financing gap and serve the SME sector.

Less than half of GCC and non-GCC banks have developed internal scoring models to assess the risk of current and prospective clients (Figure 15a). An even smaller share makes use of external scoring. Since most public registries and private credit bureaus still do not provide scoring models, the respondent banks are referring to models developed by external consulting firms, frequently non-customized models. Almost all the banks are making an effort to develop internal rating systems, combining credit scores of the owner with other information from the SME, both qualitative and quantitative. It is noticeable that very few banks use automated application processing. This result reflects to some extent the weak state of development of credit reporting systems in MENA, and the limited reliance on the quality of internal credit scores. However, the other two surveys also reported that internal scoring is only one element in the lending decision, suggesting that many banks in other developing countries are struggling with similar challenges.

At the same time, the average results reported by non-GCC banks disguise significant differences between state and private banks. As shown in Figure 15b, a significantly lower share of state banks has developed internal credit scores or internal ratings systems, and a very low share has adopted automated application processing, again revealing that these banks have not developed their SME lending technologies and risk management systems as much as the private banks.

A very low share of GCC banks informs their SME clients about the factors driving their internal score or ratings, as shown in Figure 16a. The same is true for state banks, as shown in Figure 16b. In the case of state banks, this result is probably associated with the low development and use of credit scores. In any case, these are not welcome findings, as they reveal missed opportunities to increase awareness among SMEs of their weaknesses and encourage improvements in performance.<sup>9</sup> A much larger share of non-GCC and private banks informs 9 Ayadi (2005).