Credit to Small & Medium Enterprises

in the Arab financial Systems

Jacinto Soler-Matutes

Madrid, November 21, 2011

2

1. Savings, credit and SME.

2. The banking system.

3. Non-bank financial institutions.

4. Capital markets.

5. The way forward.

1. Savings, credit and SME

4

Savings rates as a share of GDP (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Países desarrollados Países emergentes Exportadores de petróleo

1990 2000 2009

Source: McKinsey Global Institute

5

Estimated savings rates as a share of GDP (%)

Source: McKinsey Global Institute

68%

12%

20%

47%

25%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2030

Otros paísesemergentes

China

Paísesdesarrollados

6

Current account surplus (% GDP)

Source: IMF

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Argelia Bahrain Iraq Kuwait Libia Omán Qatar Arabia

Saudita

EAU

2000-05 2010 2011

7Source: World Bank.

8Source: World Bank. Union of Arab Banks. OECD

Lending to SME as a share of total lending (%)

8%

2%

14%

27%

19%

0%

5%

10%

15%

20%

25%

30%

MENA GCC Non-GCC OECD Global

9

2. The banking system.

10

0%

10%

20%

30%

40%

50%

60%

70%

MENA Asia Oriental Europa delEste

AméricaLatina

Asia del Sur África Sub-sahariana

Activos Créditos

Assets and deposits of the banking system (% GDP)

Source: World Bank.

11Source: EIB.

12

Share of state ownership in the banking system (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Algeria Syria Egypt Morocco

Source: EIB.

13

• Royal Bank of Scotland, Northern Rock …

• HypoBank, IKB ….

• ABN Amro, Fortis, ING, Dexia…

• CAM, Caixa Catalunya, …

0%

10%

20%

30%

40%

50%

60%

MENA Sub-saharanAfrica

EasternEurope

LatinAmerica

East Asia South Asia

Share of state ownership in the banking system (%)

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Market Share of Top 3 banks (%)

Source: World Bank.

0%

10%

20%

30%

40%

50%

60%

70%

África sub-sahariana

Europa delEste

MENA CCG AméricaLatina

AsiaOriental

Asia delSur

15

44.903KuwaitNational Bank of Kuwait

45.528Arabia SauditaAl Rahji Bank

46.380EgiptoArab Bank of Egypt

47.040Arabia SauditaRiyad Bank

47.258QatarQatar National Bank

48.452Arabia SauditaSamba Financial Group

50.600JordaniaArab Bank

53.379EAUNational Bank of Abu Dhabi

68.654Arabia SauditaNational Commercial Bank

76.561EAUEmirates NBD

Activos (millones US$)PaísEntidad

Largest Arab banks by assets (million US$)

Source: The Banker.

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3. Non-bank financial institutions (NBFI).

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

CCG Europa delEste

MENA AméricaLatina

Asia delSur

AsiaOriental

África sub-sahariana

Assets of non-bank financial institutions (% GDP)

Source: World Bank.

18

Assets of financial institutions (billion US$)

Source: Casa Árabe (Forthcoming).

247

1.700 1.600

2.500

63 24 47 120

-

500

1.000

1.500

2.000

2.500

50 árabesmás ricos

Grandesfortunas

Fondossoberanosárabes

Depósitosbancarios

Fondos deinversión

Fondosprivateequity(actual)

Fondosprivateequity

(previsto)

EmisionesSukuk

acumuladas

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Weaknesses of mutual funds

•Restrictions to cross-border sale of mutual funds.•Short-term focus of mutual funds in MENA•60% invest in short-term notes and instruments.•Most NBFIs controlled by banks.

39,9%

3,9%

55,7%

0,5%

Renta variable

Renta fija

Mixtos

Otros

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Private equity vs. venture capital

• Hurdles to private equity investment (e.g. company law, property rights, illiquid capital markets).

• Average private equity investment was US$ 136 million in 2010.

• Positive strong MENA focus of most PE management firms.

• Growing number of Arab PE managers, who have worked overseas.

• Only 4% of private equity assets (US$ 24 billion) fall onto the venture capital category.

• However, between 2007 and 2010, venture capital funds in MENA have increased threefold.

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23

4. Capital Markets.

24

IPO activity in 2010

Source: Casa Árabe (Forthcoming).

25

Stock market capitalization in 2011 (% GDP)

0%

20%

40%

60%

80%

100%

120%

140%

Jordan Lebanon Egypt Morocco Tunisia Syria Algeria

Source: EIB

26

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

2004 2005 2006 2007 2008 2009 2010 2011 E

Sukuk bond emissions (million US$)

Source: Casa Árabe (Forthcoming).

27

Main Sukuk markets (emissions since 2004, million US$)

Middle East; 36.184

Southeast Asia;30.445

Western countries;26.858

Source: Casa Árabe (Forthcoming).

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5. The Way Forward.

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Recommendations on the banking system

• Increase cross-border competition between market leaders.

• Improve market access for new entrants to enhance domestic competition.

0%

5%

10%

15%

20%

25%

MENA GCC Non-GCC East Asia EasternEurope

LatinAmerica

Applications for bank

licenses denied (%)

30

Recommendations on NBFIs

• Increase number of independent financial intermediaries.

• Promote cross-border VC funds and NBFIs.

• Private-public partnerships (PPP) in venture capital.

• PPP as opposed to direct company subsidies

• Improve legal framework for VC:– Company law

– Contract law

– Taxation

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Recommendations on Capital markets

• Boost liquidity of stock markets by improving trading rules and opening to foreign investors.

• Special market segment for SME (e.g. Nilex in Egypt).

• Achieve economies of scale in stock markets: MagrebEx.

• Economies of scale in fixed income products: Sukukmarket for Middle East.

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Recommendations on institution building

• Better human resources for SME (training programs).

• Credit “mediation” for SME (transparent accounting, professional reporting to apply for bank loan or VC).

• Civil society institutions (business associations) to interact between SME and governments.

• Redefine taxation and license systems to integrate informal SME.

• EU programs for new member countries to be extended to MEDA countries (e.g. SME Fit, BSP, JEUNE).

• Intra-Arab SME support programs (e.g. IDB, AFESD).

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