EBRD JORDAN MSME FRAMEWORK

INCREASING MSMES’ ACCESS TO FINANCE IN JORDAN – WHAT THE MARKET SAYS?

10 MARCH ,2016 AMMAN -JORDAN

MR. MERT DEDEBAS

WHY SME BANKING?

Risk Management Profitability

WHY SME BANKING? - RISK MANAGEMENT

Portfolio Diversification

Deposit Stability

Low level of market fluctuation

Basel III committee:

Considered SMEs customers are behaviourally more stable, giving them advantageous situations in Risk calculations. (Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), minimum capital requirements calculation)

Untapped Potential - easy portfolio increase with relatively good clients for the banks which act quicker than its peers.

Higher Margin - new risk segment for banks higher pricing.

WHY SME BANKING? - PROFITABILITY

STUDY OBJECTIVES & METHODOLOGY

Supply analysis

Provide overview of the financial sector in Jordan and its performance regarding MSME lending

Assess existing and relevant financial products and services for MSMEs offered by relevant stakeholders

Evaluate supply of financial products in the new segments (Gender Finance, Energy Efficiency and Renewable Energy Finance, Start-up Finance and MSMEs outside Amman)

Supply Survey:

26 organisations have been interviewed Governmental Institutions, Banks, Regulatory

Bodies, Business Associations, IFIs, Microfinance Institutions

Demand analysis

Provide overview of the characteristics of Jordanian MSMEs

Analyze current patterns of MSMEs’ access to finance & banking services in Jordan

Assess financing needs of MSMEs for financial and non-financial products and services

Assess demand among MSMEs for financial products in the new segments

MSMEs Sample:

416 face-to-face interviews with MSMEs in Aug-Sep 2015

Locations: Amman, Zarqa, Irbid, Karak and Aqaba Size: Micro, Small & Medium Business sector: Trade, Services, Industry &

Agriculture

5

Government Plan - Jordan 2025

6

ENABLING ENVIRONMENT - DOING BUSINESS IN JORDAN

Topics 2015 Rank

Ease of Doing Business 117

Starting a Business 86

Dealing with Construction

Permits 126

Getting Electricity 44

Registering Property 107

Getting Credit 185

Protecting Minority Investors 154

Paying Taxes 45

Trading Across Borders 54

Enforcing Contracts 114

Resolving Insolvency 145

Global competitiveness index

66

Sources: The World Bank, Doing Business Report 2015. and Jordan 2025 Blueprint

Current status

Topics Target Ranking

2025

Doing Business Index

Ease of Doing Business 75

Getting Credit 70

Global competitiveness index 50

The report stated that among the most problematic factors of doing business in Jordan:

o Restrictive labour regulations o Tax regulations & rates

o Access to finance

Jordan ranked 185 out of 189 countries regarding the indicator “Getting Credit” due to a number of reasons including: The lack of risk assessment based lending and information provided by credit bureau or credit registry which prevents commercial banks from providing loans to their clients based on their credit history.

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ENABLING ENVIRONMENT - LEGAL FRAMEWORK

SME Definition

& Laws

Start-ups

Access to Credit

Central Bank of Jordan & Ministry of Industry provided definitions for SMEs in Jordan

JEDCO is working on the development of a national Start-up and MSME Strategy

The Ministry of Industry made starting a business easier by reducing the minimum capital requirement (from JOD 1,000 to 1)

The Central Bank of Jordan is engaged in several international agreements to increase the available funds for MSMEs (approx. USD 500 million during the last 2 years)

CBJ requires banks to separately report their SME banking activities. CBJ has encouraged banks to have a separate SME department.

CBJ has lowered the threshold for loans to be reported to the public credit registry down to JOD 20,000

Credit bureau: launched and about to start operations

Government Plan - Jordan 2025 Current status

Reach a unified definition of SMEs

Prepare and adopt of SME law

Adopt a national strategy for encouragement of entrepreneurship and development of MSMEs

Reduce time to start business (No. of days) from 12 to 6

Establish a fund to support start-up SMEs

Increase the share of Banks' SME portfolios from 9% to 14%

Increase the share of Credit Bureau coverage from 0% to 55%

Increase loan guarantees for SMEs (e.g. though JLGC )

Plans to introduce a movable collateral registry

DEMAND ANALYSIS - THE SAMPLE

Region

North

Irbid

92 (22%)

Central

Amman

159 (38%)

Zarqa

91 (22%)

Central

Karak

34 (8%)

Aqaba

40 (10%)

Size Medium

115 (28%)

Micro

107 (26%)

Small

194 (46%)

Economic sector

Trade

179 (43%)

Services

118 (28%)

Industry

124 (30%)

Agriculture

47 (11%)

Ownership Male

379 (91%)

Female

37 (9%)

Randomly selected sample of 416 MSMEs

margin of error α= 5%

Confidence level =

95%

Total MSMEs in Jordan =

156,761

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9

BUSINESS GROWTH & CHALLENGES

In the next 2 years Business will be:

worse

Stay the same

Better

17%

23%

60%

4.3%

6.3%

13.7%

14.9%

21.8%

22.5%

23.5%

28.6%

33.7%

35.7%

41.8%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Supplier problems

Insufficient marketing

Government bureaucracy

Political uncertainty

High labour cost

High energy cost

Unqualified labour

High rent

Poor sales

High taxes

Competition

The majority of MSMEs (59.7%) anticipate a positive trend for their business in the next 2 years.

Companies are mainly struggling in terms of sales and marketing of their products and services, indicating competition and poor sales as one of their main challenges.

MSMEs from the survey mentioned sales and marketing improvements as their most important plans for the next two years.

Business expansion was mentioned as another major plan through seeking new market inside and outside Jordan and opening up additional branches or extending the product range.

Rapid increase 19.50%

Increase 40.30%

Remains stable

23.30%

Decrease 15.20%

Rapid decrease 1.80%

How do you see the business in 2 years?

What are the main challenges besides access to finance?

7%

8%

8%

15%

22%

24%

28%

30%

32%

33%

55%

0% 10% 20% 30% 40% 50% 60%

Enhance staff training

Energy efficiency investments

Process optimisation

Move to new premises

Lower overall costs

New equipment

New markets outside Jordan

Extension of product range

Open additional branches

New markets in Jordan

Improve sales & marketing

Plans

Most important plans in the next 2 years

ACCESS TO FINANCE -

EXISTING FINANCING SOURCES

8.4%

15.0% 13.1%

9.3% 6.5%

19.8% 18.2%

8.9%

4.2% 2.6%

35.7%

12.2%

6.1% 5.2%

1.7%

.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Loan from banks Clients Friends and Family Suppliers Loan from MFI

Micro

Small

Medium

Use of bank loans is low, given the high rejection rate for start-up companies at commercial banks, due to lack of collateral or insufficient financial documents.

The likelihood to take out a loan from a bank increases with the size of the business.

Micro companies make relatively more use of alternative funding sources such as loans from family and friends, suppliers and microfinance institutions

In general, dependence on bank loans is low, given the high rejection rate for start-up companies at commercial banks.

Finance during start-up phase

Own fund 83%

Other sources 17%

What are the other sources ?

Main financing sources (besides own funds)

Reasons for loan rejection during start-up phase

Lack of collateral

62%

Lack of financial

documents 15%

High debt to income ratio

15%

No financial track record

8%

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ACCESS TO FINANCE -

RELATIONSHIPS WITH COMMERCIAL BANKS

Total Micro Small Medium

Avg. Number Of partner Banks

1.4 0.9 1.3 1.8

76.50%

64.40%

46.50%

26.20% 20.30%

14.20% 9.90%

3.50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Most important factors in cooperation with a bank

Number of partner banks in relation to business size

With increasing business size, companies are more likely to hold accounts at several banks.

Change of banks: on average, only 13.9% of companies have changed banks in the last two years. Young entrepreneurs (below 30 years) and female owners are found most likely to change partner banks. Reasons for changing banks are poor quality of services or inadequate terms and conditions.

For micro companies, accessibility is a more important aspect, while medium enterprises put a higher emphasis on the technological infrastructure of a bank.

ACCESS TO CREDIT

Never applied for a loan

57.7%

Current outstanding

loan 24.8%

No current outstanding loan

17.5%

Have applied for a loan

42.3%

Loan applications and loans outstanding (N=416)

Total Micro Small Medium

Loan application 42.3% 33.6% 39.7% 54.8%

Loan outstanding 24.8% 17.8% 23.7% 33.0%

Agri Industry Trade Services Average loan amount (JOD)

75,000 340,574 84,284 221,376

N 7 34 27 27

Average loan amount according to business size (N=95)

Loan purpose: Loans from Banks are mostly used for business expansion purposes (37.9%), and financing of working capital (31.1%).

Loan amount: The average loan amount is JOD 214,252. Overall, the loan amount increased with the size of the business due to growing financing needs, but also due to the availability of more collateral, making medium sized companies eligible for higher loan amounts.

Loan term: The average loan term is 3.4 years. Due to the higher loan amounts, medium companies have relatively more often taken out longer term loans of 4.2 years on average.

Interest rate: Overall, interest rates amount to a modest average of 7.2%.

Collateral: The most common type of security required by financial institutions in Jordan is real estate, which was supplied by over 45.5% of companies.

Time between loan application and disbursement: The majority of companies (78.7%) had to wait up to 30 days until the loan was disbursed

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13

DEMAND FOR FINANCIAL PRODUCTS AND SERVICES -

DEMAND FOR CREDIT

Interested 54%

Not interested 28% 7.2%

3.7%

3.1%

2.3%

Interest with constraints

18%

Non-compliancewith Shariah law

Repaymentconcerns

Difficult loanprocess

No collateral/financialdocuments

Are you interest in obtaining a loan

Current loan 25%

No current

loan 75%

Although 72% of MSMEs are interested in obtaining a loan in the future

Only 25% of total MSMEs have or had a loan in the past two years

Do you have an active loan or had a loan in the past two years ?

Not interested in a loan

interested in a loan

Have a current

loan

No current

loan

a “go” Zone

Repeated borrowers

20.4%

Observation Zone

Currently not interested

4.3%

a “go” Zone

Potential new borrowers

51.4%

A „Hold“ Zone

Not interested

23.8%

Demand for loans vs. outstanding loans

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INDICATIVE LOAN FEATURE

Total Micro Small Medium

Average loan amount (JOD) JOD 210,866 49,259 198,494 382.452

Average loan term (Year) 5.2 5.2 4.9 5.6

Average interest rate 4.20% 4.00% 4.20% 4.30%

Average collateral coverage 85% 66% 91% 91%

What are the loan conditions MSMEs are looking for ?

What are the loan purpose ?

Total Micro Small Medium

Business expansion 60.50% 62.30% 60.40% 59.10%

Finance working capital 30.00% 24.50% 32.70% 30.30%

Extension of product range 25.00% 32.10% 19.80% 27.30%

Purchase of fixed assets 24.10% 17.00% 20.80% 34.80%

Modernization 21.80% 20.80% 23.80% 19.70%

Average received vs desired loan conditions:

A direct comparison of what has been received and what is required by MSMEs shows that certain loan features such as loan amount and collateral coverage do not differ from the actual demand.

However, companies would rather like to use their loans for long term investments to expand their businesses.

This suggests that there is a lack of adequate MSME products that fit to the needs of the customers.

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DEMAND FOR OTHER BANKING PRODUCTS AND SERVICES

Total Micro Small Medium

Leasing 19.5% 15.9% 18.1% 26.8%

Deposit/ Savings 16.2% 14.6% 16.1% 18.3%

Letter of Credit 15.9% 15.9% 18.1% 11.3%

Overdraft facilities 16.9% 20.7% 14.8% 16.9%

Insurance 14.2% 15.9% 13.4% 14.1%

International

transfer 17.2% 17.1% 19.5% 12.7%

What banking services you would be interested to use in the future

9.7%

22.2%

25.1%

27.3%

36.1%

38.1%

44.6%

48.6%

48.7%

67.8%

91.2%

0% 20% 40% 60% 80% 100%

Leasing

Overdraft facilities

Factoring

Letter of credit

Deposit/ savings

Guarantees

International transfers

Credit cards

National transfers

Payment and collection

Current Accounts

What banking services you are currently using?

Total Micro Small Medium

Mobile Banking 40.1% 48.6% 40.2% 28.0%

P.O.S. 21.9% 11.9% 17.2% 44.0%

Internet Banking 20.5% 18.3% 27.9% 12.0%

Phone Banking (Call centre) 17.3% 21.1% 14.8% 16.0%

Through which delivery channel ?

Most MSMEs are served through branches and outlets (85.4%)

however

mobile banking, internet banking and phone banking (via call centre) is mostly requested by MSMEs

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DEMAND FOR NON-FINANCIAL SERVICES

24%

27%

29%

30%

32%

33%

35%

38%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Accounting & Finance

Human Resources

Legal & Insurance

Operations

Information Technology

International Business

Marketing & Sales

Business Planning

Professional training courses companies would like to attend (N=414)*

* Several answers were possible.

Total Micro Small Medium

Business development services 59.4% 38.4% 58.2% 80.2%

Information sharing 19.8% 12.1% 20.6% 25.2%

Financial and Tax Advice 19.3% 7.1% 16.4% 35.1%

Accountancy/ Bookkeeping 18.8% 12.1% 18.5% 25.2%

Business Plan Development 11.3% 7.1% 10.1% 17.1%

Never Used business development

services before 40.6% 61.6% 41.8% 19.8%

Use of non-financial services according to business size (N=399)*

There is a significant potential to extend the non-financial services to the MSME sector as over 40% of the respondents have never used these, especially micro and small enterprises.

Information sharing events are very popular among the companies that used business development services in the past therefore it is recommended that the commercial banks increasingly offer such services by organizing networking events, trade fairs etc.

Market gap

MSME portfolio of Jordanian commercial banks and MFIs in 2014 of

JOD 1.76 Billion

GAP ANALYSIS

Indicative future credit demand

Category Nr. of formal enterprises

% loan demand Average demanded loan

volume (JOD)

Indicative future credit demand (JOD

billion) Micro 139,539 73% 49,259 5.01

Small 14,970 71% 198,494 2.10

Medium 2,252 73% 382,452 0.63

Total SME 2.73

Total MSME 7.74

VS.

Significant unmet credit demand

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THE WAY FORWARD

Increase Technical Assistance (TA) to commercial banks in the field of MSME finance

Provide long term funding

Establish a risk-sharing mechanism with commercial banks

Avoid limiting the interest rates applied in credit lines

Build capacities of banks in providing non-financial services through fostering cooperation with EBRD SBS

Provide sub-loans to MFIs

Consider establishing a special loan guarantee fund for Syrian refugees

For International Financial Institutions

Develop internal capacity

o To implement risk based loan assessment

o To reduce the share of collateral based lending decision

Implement risk based loan pricing for MSMEs

Decrease the loan assessment and processing time

Help financial inclusion – apply supply driven approaches instead of demand driven ones

Increase CRM activities to catch the potential among existing non-loan clients and previously rejected clients

Make use of credit bureau services

Increase cooperation with non-financial service providers

For Commercial Banks

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Frankfurt School of

Finance & Management

www.msmejordan.com info@msmejordan.com

ومشاركتملحضوركم شكراً

GRAZIE PER L'ATTENZIONE

Vielen Dank für Ihre Aufmerksamkeit!

THANK YOU VERY MUCH FOR YOUR ATTENTION!

Mert Dedebas