4 In the first study, Beck, Demirguc-Kunt and Martinez Peria (2008) report that the average share of SME lending is smaller in developing countries (16 percent of total lending) by comparison with the average share in developed countries (22 percent of total lending). Banks in developing and developed countries are primarily attracted by the potential profitability of the SME sector and serve SMEs primarily through dedicated SME units. Government programs are considered favorable and prudential regulations are not perceived as burdensome. Scoring models are used by most banks but they are just one of the inputs in loan decision. Banks in developing countries report that macroeconomic instability is the main obstacle to SME lending, rather than flaws in the legal and contractual framework. However, the second study (Beck, Demirguc-Kunt and Martinez Peria, 2009), based on the statistical analysis of the dataset concludes that the differences in SME lending between developing and developed countries are actually explained by differences in the quality of the legal and contractual environment (weaker in developing countries). Overall, their analysis suggests that the enabling environment is more important than firm size or bank ownership in shaping bank financing to SMEs.

The study by de la Torre, Martinez Peria and Schmukler (2009) relies primarily on on-site interviews with 37 banks in Argentina, Chile, Colombia and Serbia. The survey did not focus on measuring SME lending, but included 92 questions covering the strategic approach to SME lending, business models, and risk management. The authors complement the information from the interviews with a survey by the International Finance Corporation (IFC) across 8 developed and developing countries and annual surveys undertaken by FRS (Inmark Group) in 7 countries. All in all, data from 48 banks and one leasing company in 12 countries was used in the analysis.

This study investigates to what extent the conventional wisdom on SME lending holds in practice – the conventional view is that large banks are not attracted to SME lending and that the SME business is dominated by small banks and based on relationship lending. Their results show that the conventional view is not prevalent in practice. Like the study by Beck, Demirguc-Kunt and Martinez Peria (2008), they find that the SME segment is perceived to be profitable and that most banks are interested in serving SMEs, including large and foreign banks. Almost all the banks in the sample have separate SME units and offer a wide range of products and services. In addition to relationship lending, banks apply different transactional technologies such as credit scoring, risk-rating tools, and special products such as leasing and factoring. There are significant differences across banks and countries regarding the use of particular techniques, but these technologies allow banks to compensate for weaknesses in the enabling environment. Interestingly, the use of government supported programs is reported to be low.

# **3.  The MENA Survey**

Our survey (henceforth the MENA survey) was developed and conducted jointly with the Union of Arab Banks (UAB), which is the regional association of all banking associations in the region and has a membership of about 330 banks. The MENA survey has 50 questions distributed into four broad sections. Like the two previous surveys, we included qualitative questions in three broad areas: the strategic approach to SME lending, the main products offered to SMEs, and the risk management techniques employed. Moreover, like the survey by Beck, Demirguc-Kunt and Peria (2008), we also included a fourth and quantitative section designed to measure the extent of SME lending, the share of investment loans in total SME loans, and other variables.