1

# **1.   Introduction**

The financing of small and medium sized enterprises (SMEs) has attracted great interest from academics and policy-makers around the world. SMEs play an essential role in building a competitive private sector and contributing significantly to employment and economic activity.<sup>1</sup> Despite their importance, SMEs seem significantly more financially constrained than large firms, especially in developing countries. Indeed, enterprise-level surveys conducted by the World Bank show that a much smaller share of SMEs has a loan or a line of credit by comparison with large firms, and also that access to finance is relatively more constrained in lower and middle income countries (Figure 1a). Other studies using enterprise-level data show that the lack of access to external finance constitutes a major constraint to SME growth.<sup>2</sup> Despite the importance of the topic of SME finance, there has been relatively little research on the supply side of bank finance to SMEs. Notable exceptions are Beck, Demirguc-Kunt, and Peria (2008 and 2009), and De la Torre, Peria, and Schmukler (2010), which provided the first measures of the extent of bank lending to SMEs, as well as the drivers and obstacles to further SME lending. These studies were based on two surveys, the first covering 45 developing and developed countries and the second 3 Latin American countries and one Central European country. The results show that most banks increasingly see SMEs as an attractive business, in contrast with the traditional view that SME lending is dominated by small banks and based on relationship lending. However, the studies also show that institutional obstacles to SME lending remain and that the SME market is still far from saturated.

The ongoing efforts to investigate further the status of bank lending to SMEs are particularly relevant for the Middle East and North Africa (MENA) region. As shown in Figures 1b and 1c, enterprise-level surveys conducted by the World Bank suggest that SMEs are particularly financially constrained in MENA countries – only 20 percent of SMEs in MENA have a loan or a line of credit, a lower share than any other region, and only 10 percent of their investment expenditures are financed by a bank loan, a share that is higher only to the one in Sub-Saharan Africa. These results have motivated the design and implementation of a survey of bank lending to SMEs in the MENA region that complements the information provided by enterprise surveys and provides further insights into the challenge of enhancing SME access to finance.

The objective of this paper is to report the results of a joint survey of the Union of Arab Banks and the World Bank (henceforth the MENA survey), including not only the bank responses but also the statistical analysis of the dataset. The MENA survey was conducted between December 2009 and April 2010 and secured a high response rate across the region. It draws on material from the two previous surveys conducted by the World Bank, thus allowing for comparisons with previous results. However, the MENA survey also contains new material, designed to address the specificities of the MENA region and provide more information and granularity to

> 1 According to Ayyagari et al., (2007) SMEs account for more than 60% of manufacturing employment across 76 developed and developing economies.

> 2 Schiffer and Weder (2001), IADB (2004) and Beck et al. (2005, 2006 and 2008) show SMEs perceive access to finance and cost of credit to be greater obstacles than large firms and these factors affect their growth.