18 across banks, indicating the existence of other important bank and country-level effects. For example, some individual banks have better strategies and lending technologies, and there are country-level effects and programs that are not easily measurable (e.g. interest subsidies, exemptions on reserve requirements). Even acknowledging these caveats, however, we believe that the results are insightful and help in initiating more research in this important area.

# **6.  Summary of Findings and Policy Implications**

This paper reports the results of a survey of SME lending with unusually high coverage of banks in the MENA region. The paper shows that the average SME loan portfolio in MENA is relatively small amounting to less than 8 percent of total loans. The survey also shows the wide differences in the scale of SME lending between GCC and non-GCC countries (much smaller in the former group), as well as the scope for further SME lending in both sets of countries, revealed by the large difference between the long-run targets and the actual lending levels.

State banks play an important role in SME lending in many MENA countries, to a large extent a compensatory role for the low private bank involvement in SME finance in these countries. Moreover, state banks seem to take more risk than private banks, as indicated by broader selection criteria, more exposure to term lending, and softer collateral requirements. However, they do not seem to have developed sufficient risk management capacity to manage these risks – a smaller share of state banks has introduced dedicated SME units, adopted internal scoring models, and conducted regular stress tests to monitor the risks related to SME lending.

Several MENA countries have introduced credit guarantee schemes, and there is some evidence that these schemes may have contributed to more SME lending. The countries with the largest shares of SME loans in the total loan portfolio are the ones with the largest schemes, and the statistical analysis of the dataset also suggests that credit guarantee schemes may have induced more SME lending, controlling for other factors. However, these results do not necessarily mean that MENA credit guarantee schemes are cost-effective, in the sense of reaching the maximum number of viable and credit-constrained SMEs within their overall guarantee envelope.

These and other policy interventions are in many countries compensating for weaknesses in financial infrastructure, including weaknesses in collateral and insolvency regimes, as well as deficiencies in credit information systems. These interventions may be well justified, but they should not be the main components of the architecture of SME finance in the MENA region.

Improving financial infrastructure should be the priority item in the policy agenda of MENA countries. MENA banks report that deficiencies in financial infrastructure are one of the major obstacles for further SME lending, and the statistical analysis of the dataset largely confirms this survey result. Improving financial infrastructure will entail expanding the range of movable assets that can be used as collateral, improving registries for movables, and improving enforcement and sales procedures for both fixed and movable assets. It also entails upgrading public credit registries, and more importantly, introducing private credit bureaus capable of significantly expanding coverage and the depth of credit information.