spurring entrepreneurship. Indeed, a well-functioning financial system is one that does a good job of screening firms and allocating resources efficiently to those with the best projects, ideas, and entrepreneurial energy. Poorly-functioning financial systems, in contrast, funnel credit to the rich and powerful, limiting economic opportunity and prosperity to only a few. An effective financial system can foster competition by allocating resources to new, more promising firms to enter the market, which forces less efficient incumbent firms to improve their performance or exit. An ineffective financial system can become an impediment to entrepreneurship and growth (Aghion and Howitt, 2010). Furthermore, financial development has been found to have a large, positive impact on small firms, which again suggesting that improvements in financial services foster competition and efficiency throughout the economy. Thus the financial system affects entrepreneur’s economic opportunities, and it influences who can launch a new business venture and who cannot.

Financial development should be a central component of the employment growth agenda facing the Arab countries. The banking systems are large in most Arab countries, but they also have some of the highest rates of credit concentration in the world. SME finance in the Arab region is dominated by banks, with capital markets and non-bank financial institutions (NBFIs) being less significant financing sources for SMEs as compared to other regions. Bank lending to SMEs varies significantly by product, size of loan and client, and lending technology used. The majority of Arab banks already provide SME finance: 92 percent of the banks already have SMEs as clients. Around 70 percent of banks have SME units focused on SME finance. However the average share of the Arab bank portfolios made up of SME lending is only 7.6 percent (World Bank, 2011a). Certain segments of the population, such as women, may be excluded from business activity and from finance, for example because they traditionally do not own land, which is often still the preferred collateral for SME lending (See Box 1).

The Arab region has the lowest levels of usage of bank loans of all regions except Sub-Saharan Africa, according to the World Bank enterprise and banks surveys (World Bank, 2011a). Only 20 percent of SMEs have a loan or line of credit and the average share of SME lending on total loans is only eight percent in the region, which is the lowest ratio among all the regions (Figures 15 and 16). Bank lending tends to be directed to large, corporate customers, and many banks still prefer to utilize excess liquidity to finance the government’s deficit or the activities of large established corporations.

**Box 1: Gender Disparities—Women’s Economic Empowerment**

Female SME owners can face gender-related barriers that affect their access to finance. These barriers tend to vary by country and household. Women suffer more from constrained access to finance compared to men, whether in terms of the cost of finance, ability to gain approval for **Figure (17): Collateral Value for SMEs, by Gender of Principal Owner** financing, or legal disputes and conflict resolution in case of bankruptcy. In addition, 800 700 banks request more strict collateral 600 requirements when dealing with women 500 investors as they are perceived as more risk 400 (Figure 18).

<!-- Start of picture text --> Figure (17): Collateral Value for SMEs, by Gender of<br>Principal Owner<br>800<br>700<br>600<br>500<br>400<br>300<br>200<br>100<br>0<br>Lebanon Egypt Libya Morocco Syria Yemen Jordan<br>Female Owned Male Owned<br>Source: World Bank Enterprise Surveys (2007-2011).<br><!-- End of picture text --> Although the law gives women ownership rights, they often have less productive assets and lack independence in managing these assets (being under the guardianship of their brother, husband, or even son). In many cases they are prevented from using their property as collateral for loans, limiting their ability to participate as independent agents in private19