**_Source:_** World Bank Enterprise Surveys (2007-2011).

Recent estimates conducted by McKinsey for the IFC-led G20 Experts Group on SME Finance suggest that there is a considerable financing gap for SME lending in MENA, totaling US$ 2.26 billion for Egypt, Jordan, Morocco, Tunisia, and Lebanon alone.<sup>21</sup> The estimated SME credit gap for Egypt is US$ 1.05 billion, for Jordan US$ 547 million, for Morocco US$ 497 million, for Tunisia US$ 247 million, and for Lebanon US$ 26 million. According to McKinsey, SME lending would have to increase by 125 to 150 percent in the MENA region in order to meet demand, that is more than double, which is the second highest regional percentage increase projected, after Sub-Saharan Africa (Stein, Goland, and Schiff 2010).

Key constraints hindering access to finance for SMEs in MENA include the financial sector regulatory and supervisory framework, financial institutional infrastructure, and financial intermediaries lending capacity. The recent World Bank report(2011) shows that the failure to broaden access to finance is due to a number of factors including, a weak financial infrastructure that increases lending risks, historical connections between large banks and large industrial groups, weak banking competition, and many missing non-banking financial institutions, markets and instruments, all of which are closely related. Therefore, the Arab countries face a challenging financial development agenda, able to improve substantially access to finance to the private sector, in order to generate more inclusive growth and employment opportunities. Economic analysis also suggests that SMEs in countries that have stronger secured transaction laws and registries have greater access to credit, better ratings of financial system stability, lower rates of non-performing loans (NPLs), and a lower cost of credit (Alvarez de la Campa 2010). According to the World Bank (2012), the latest estimates of SMEs NPLs are 12 percent of total loans. The financial system can play a pivotal role in economic growth, as well as, job creation as it influences who can start a new project, and who cannot; and who can expand their business and who cannot.

On the demand side, according to banks interviewed in the Arab region, enterprise creditworthiness, liquidity of the financial intermediaries, and the availability of risk-sharing instruments, also pose key constraints. Banks cite a lack of enterprise transparency, difficulties in using collateral, especially movable collateral, and uncertainty over creditor rights as primary barriers to their greater involvement in finance (Figure 23). Several Arab countries suffer from government-enforced interest rate caps, the absence of national SME strategies, the scarcity of credit information and scoring system, and lack of integration of SME credit information into public credit registries or private credit bureaus.<sup>22</sup> There are also concerns regarding absence of effective and well enforced consumer protection policies.

<!-- Start of picture text --> Figure (23): Proportion of Arab Banks Responding that Obstacle is Very Important or Important for SME Financing<br>( percent )<br>100<br>80 24 Very Important Important<br>60 43 45<br>36<br>40 71 29<br>23<br>25<br>20 40 40 32<br>34 17<br>23<br>13 17<br>0 6 7<br>21 See McKinsey (2011). SME Reliable Credit Weak Creditor Regulations and Competition in Demand from Sharia Bank Specific<br>22 Transparency Collateral by Information Rights Legal the SME SMEs Compliant Factors<br>Over the past three years, several MENA countries have developed their credit bureaus. Only six MENA countries SMEs Systems Environment Segment Products<br>have operational credit bureaus, with the oldest established in Kuwait in 2002. Three countries, namely, Morocco,<br>Source: World Bank Enterprise Surveys (2007-2011).<br>Egypt, and the UAE, have recently established private credit bureaus. Two-thirds of MENA countries still entirely<br>rely on public credit registries. A lack of widely available and comprehensive credit information limits SMEs access<br>to finance.<br><!-- End of picture text --> 22