Sample - Saudi SME Sector - Saudi SME Sector.pdf · Popular SME definition in KSA Saudi Arabia SMEs share in total number of firms In Saudi Arabia, information related to the financial

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SME LENDING IN KSA – Market Opportunities

November 2013


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FirmSize

Employees Assets Annual Sales

Micro < 10 < US$100,000 < US$100,000

Small < 50 < US$3 million< US$3 million

Medium < 300 < US$15 million< US$15 million

Introduction World Bank criteria for SMEs

Youth Unemployment Rate

� SMEs are companies with employee strength below acertain limit as defined by various institutions.Although there exists no globally accepted uniformdefinition for SMEs, the World Bank provides 3parameters of which at least 2 must be met to beaccounted as an SME

� SMEs are estimated to account for about 95% of thetotal registered firms across the world. According toInternational Finance Corporation (IFC), SMEs, on aworldwide basis, account for approximately 50% offormal employment

� According to the Word Bank, SMEs play an essentialrole in fuelling economic growth, making marketsefficient and reducing unemployment

� The Youth Unemployment Rate in the Middle East isestimated to be 25.1% as against global average of12.6%. Such situation calls for creating jobsimmediately for the Young Entrepreneurs throughdevelopment of a robust and fast growing SME Sectorin the region

− Apart from reducing unemployment, a rapidlygrowing SME Sector will also hep the oil richcountries to reduce their dependence on oil &oil related sector

MARKET OPPORTUNITIES – Global & MENA Sector overviewSMEs are increasingly getting importance from policymakers because of their potential to drive economic growth and

reduce unemployment

12.6%

25.1% 23.7%

18.2%14.2%

9.5% 8.3%0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

Middle East NorthAfrica

DevelopedCountries

South EastAsia

South Asia East Asia

Youth Unemployment Rate

Global Average - Youth Unemployment Rate

Source: IFC, Education for Employment Report


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� As of 2011, the SME sector contributed 28% of thetotal GDP in the MENA region which is considerablylower than the developed regions like Europe (60%)and the US (51%) implying its under-developed state

� However, the sector contributes 71% of the totalemployment in the region which is at par with thedeveloped economies

Source: IFCSource: Government agencies, EIU

60%

51% 50%

37%

28%

75%70%

62%56%

71%

Europe USA Singapore Malaysia MENA

SMEs contribution to GDP (%) SMEs share in total employment (%)

SME sector GDP contribution and employment, 2011 Type of SMEs by region, 2010

81%

71%

69%

45%

89%

68%

74%

12%

23%

21%

40%

8%

22%

17%

7%

6%

10%

15%

3%

10%

9%

East Asia

Latin America

Sub-Saharan Africa

Eastern Europe& Central Asia

South Asia

MENA

Total

Informal & Non employer firms Micro Enterprises Formal SMEs

170-205

47-57

36-44

18-22

75-90

19-23

420-510

Number of SMEs(million)

MARKET OPPORTUNITIES – Global & MENA Sector overviewAs of 2011, the MENA SME sector GDP contribution stood at 28% which is considerably lower than other developed

regions like Europe (60%) and the US (51%)

� In terms of no. of firms, there were around 19-23million SMEs operational in the MENA region in 2010

� Most of these SMEs were Informal and Non-employerfirms while only 10% were Formal SMEs in the region


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Source: IFC & Mckinsey Joint Report

Credit gap relative to the current outstanding SME credit

� Though SMEs have the potential to drive economic growth, they face significant hurdles in securing bank financing

� As per a joint study conducted by McKinsey & Company and International Finance Corporation (IFC), it is estimated that totalcredit gap among the formal SMEs was US$1,600 billion on worldwide basis, with the highest credit gap existing in HighIncome Countries followed by East Asia region

� SMEs based in the MENA region were the second most credit starved companies at 150%, implying an excellent growth

opportunity for SME lending institutions / banks to in the region

Formal SMEs credit gap (US$ billion)

3,700

17,000

13,500

100

115

700

230

30

2,500

0.035.771.4107.1142.8178.5214.2249.9285.6321.3357.0392.7428.4464.1499.8535.5571.2606.9642.6678.3714.0749.7785.4821.1856.8892.5928.2963.9999.61035.31071.01106.71142.41178.11213.81249.51285.21320.91356.61392.31428.01463.71499.41535.11570.81606.51642.21677.91713.61749.31785.01820.71856.41892.11927.81963.51999.22034.92070.62106.32142.02177.72213.42249.12284.82320.52356.22391.92427.62463.32499.02534.72570.42606.12641.82677.52713.22748.92784.62820.32856.02891.72927.42963.12998.83034.53070.23105.93141.63177.33213.03248.73284.43320.13355.83391.53427.23462.93498.63534.33570.03605.73641.43677.13712.83748.53784.23819.93855.63891.33927.03962.73998.44034.14069.84105.54141.24176.94212.64248.34284.04319.74355.44391.14426.84462.54498.24533.94569.64605.34641.04676.74712.44748.14783.84819.54855.24890.94926.64962.34998.05033.75069.45105.15140.85176.55212.25247.95283.65319.35355.05390.75426.45462.15497.85533.55569.25604.95640.65676.35712.05747.75783.45819.15854.85890.55926.25961.95997.66033.36069.06104.76140.46176.16211.86247.56283.26318.96354.66390.36426.06461.76497.46533.16568.86604.56640.26675.96711.66747.36783.06818.76854.46890.16925.86961.56997.27032.97068.67104.37140.07175.77211.47247.17282.87318.57354.27389.97425.67461.37497.07532.77568.47604.17639.87675.57711.27746.97782.67818.37854.07889.77925.47961.17996.88032.58068.28103.98139.68175.38211.08246.78282.48318.18353.88389.58425.28460.98496.68532.38568.08603.78639.48675.18710.88746.58782.28817.98853.68889.38925.08960.78996.49032.19067.89103.59139.29174.99210.69246.39282.09317.79353.49389.19424.89460.59496.29531.99567.69603.39639.09674.79710.49746.19781.89817.59853.29888.99924.69960.39996.010031.710067.410103.110138.810174.510210.210245.910281.610317.310353.010388.710424.410460.110495.810531.510567.210602.910638.610674.310710.010745.710781.410817.110852.810888.510924.210959.910995.611031.311067.011102.711138.411174.111209.811245.511281.211316.911352.611388.311424.011459.711495.411531.111566.811602.511638.211673.911709.611745.311781.011816.711852.411888.111923.811959.511995.212030.912066.612102.312138.012173.712209.412245.112280.812316.512352.212387.912423.612459.312495.012530.712566.412602.112637.812673.512709.212744.912780.612816.312852.012887.712923.412959.112994.813030.513066.213101.913137.613173.313209.013244.713280.413316.113351.813387.513423.213458.913494.613530.313566.013601.713637.413673.113708.813744.513780.213815.913851.613887.313923.013958.713994.414030.114065.814101.514137.214172.914208.614244.314280.014315.714351.414387.114422.814458.514494.214529.914565.614601.314637.014672.714708.414744.114779.814815.514851.214886.914922.614958.314994.015029.715065.415101.115136.815172.515208.215243.915279.615315.315351.015386.715422.415458.115493.815529.515565.215600.915636.615672.315708.015743.715779.415815.115850.815886.515922.215957.915993.616029.316065.016100.716136.416172.116207.816243.516279.216314.916350.616386.316422.016457.716493.416529.116564.816600.516636.216671.916707.616743.316779.016814.716850.416886.116921.816957.516993.217028.917064.617100.317136.017171.717207.417243.117278.817314.517350.217385.917421.617457.317493.017528.717564.417600.117635.817671.517707.217742.917778.617814.317850.0

Total Excluding HighIncome OECD

Total

High Income OECD

MENA

South Asia

Ctrl Asia & East Europe

Latin Amirecia

Sub Saharan Africa

East Asia

850

1,600

700

140

40

130

155

100

310

Total Excluding High

Income OECD

Total

High Income OECD

Middle East and North

Africa

South A sia

Central Asia & Eastern

Europe

La tin Amirecia

Sub Sahara n Africa

East Asia

26%

10%

6%

150%

35%

20%

75%

360%

14%

Total

Excluding

High IncomeOECD

Total

High Income

OECD

Middle East

and North

Africa

South A sia

Central Asia &

Eastern

Europe

La tin

Amirecia

Sub Sahara n

Africa

East Asia

SMEs credit gap as percentage of current outstanding SME credit (%)

Total formal SMEs outstanding credit (US$ billion)

MARKET OPPORTUNITIES – Global & MENA Sector overviewDue to inadequate bank financing, SMEs across the globe have not been able to grow to their full potential, especially

in the Sub Saharan Africa & MENA regions


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Weighted average SME financing targets & actual SME financing by banks (as % of total bank financing)

19.6%

26.7%

12.5%

7.6%

13.2%

2.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

MENA Non - GCC GCC

Target for SME Lending Actual SME Lending

Source: Union ofUnion of Arab Banks and World Bank report , January 2011, Bayina

� As shown above, there exists significant differences between long-term targets and actual SME lending rates in the MENAregion. This is evident both in the case of GCC and Non–GCC countries, although, target rates are much lower in the GCCregion. One of the reasons for setting such low target lending rates is because SME lending is considered riskier byconventional mainstream banks in the GCC countries

� Due to the significant differences between target lending and actual loan disbursement in the GCC region, SME’s cannot

rely solely upon the existing banking infrastructure and are desperately looking for other alternatives to finance their

businesses

MARKET OPPORTUNITIES – Global & MENA Sector overviewLow lending target rates in the GCC region imply limited appetite for the existing banking infrastructure to lend to the

SME sector


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East Asia

100-125 m SMEs

Latin America

20–25m SMEs

38–47%

Sub-Saharan Africa

25–30 m SMEs

61–75%

55–67%

Middle East & North Africa

9 – 11 m SMEs

41–50%

Central Asia & Eastern Europe

9 – 11 m SMEs

44–54%

Financially underserved/un-served SMEs as % of total enterprises

Source: Mckinsey

South Asia

34 – 41 m SMEs

44–53%

High-income OECD

3-4m SMEs

29 – 35%

The map above provides information on the number of SMEs in millions (m) that are either under funded or not funded at allacross various regions. It also provides further information as what proportion do they constitute relative to total enterprises insuch regions

MARKET OPPORTUNITIES – Global & MENA Sector overviewAs per Mckinsey, around 9-11 million SMEs across the MENA region either lack adequate funding or have no access to

it at all


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Growing market for SMEs

Source: McKinsey

The opportunity for lending institutions to serve credit starved SMEs in the MENA region is huge. In 2010, thebanking revenues from SMEs in the region totaled US$6 billion and is estimated to grow at a CAGR of 18% forthe next 5 years to reach US$15 billion in 2015

Total

Eastern Europe

MENA

Sub-Saharan Africa

Latin America

South Asia

East Asia

150

30

6

5

27

20

62

217

19

9

7

33

44

105

366

49

15

12

59

64

167 20

21

18

19

18

14

20

SME banking revenue (US$ billion), 2010 Growth, 2010-15 (US$ billion) SME banking revenue, (US$ billion), 2015 CAGR %

MARKET OPPORTUNITIES – Global & MENA Sector overviewThe existing credit gap will drive the banking revenues to grow at a CAGR of 18% in the MENA region over the next 5

years


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Commercial47%

Construction27%

Industrial12%

Social Services

6%

Others8%

Source : GCC economic Review – Oct 2011

SMEs96%

Others4%

Source : EROP – GCC (2011)

Type of Enterprise

Number of Employees

Annual Revenue

Small 3 – 49 SR500,000 – SR5 million

Medium 50 – 200 SR5 million – SR50 million

Popular SME definition in KSA Saudi Arabia SMEs share in total number of firms

� In Saudi Arabia, information related to the financialperformance of SMEs, their employment trend andsurvival is very scarce

� Based on certain available pieces of information, it isestimated that SMEs account for about 96% of the totalbusinesses in the KSA

– Commercial & Hotels segment constitutes the largestshare of SMEs (47%), followed by ConstructionSegment (27%) in Saudi Arabia

Key Highlights Saudi Arabia – SMEs composition

MARKET OPPORTUNITIES – Saudi SME Sector overviewSaudi SME Sector accounts for 96% of the total firms in the region


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Source: Government Agencies, NCB

99%

80%

50%

30% 28% 28%

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

Lebanon Egypt Jordan UAE KSA Bahhrain

SME Sector GDP contribution, 2011

25% 25%28%

33%

50%

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

2005 2010 2011 2012 2025

Saudi government plans to

increase SME contribution

to 50% of Saudi GDP by

2025

� Contribution of the SME sector in the Saudi Arabianeconomy has increased over the years, but still remainslow compared to other comparable economies

– As of 2011, SME sector contribution to KSA GDPstood at 28%, much lower than Lebanon (99%),Egypt (80%), Jordan (50%) and the UAE (30%)

– Notably, KSA government plans to increase theSMEs contribution to GDP to 50% by 2025


Saudi SME Sector GDP Contribution, 2005 - 2012

Key Highlights

MARKET OPPORTUNITIES – Saudi SME Sector overviewSME sector contribution to Saudi economy has increased over the years but still remains low in comparison to peer

economies in the region


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SME Sector share in total bank lending

� SME bank financing in Saudi Arabia is difficult to procure dueto lack of interest by banks and financial institutes

Loan requirement of more than SR100 million by largecorporations are focal areas for banks

Of the total SMEs based in MENA region, only 20% have adirect line of credit or loan

� Similar to the MENA region, Saudi SMEs are struggling toraise financing through equity due to scarcity of venturecapital and angel investors that usually fund early stagecompanies (most being SMEs)


Source: World Bank

1.7% 2.0%

13.2%

7.6%

0.0%

5.0%

10.0%

15.0%

20.0%

Saudi Arabia GCC Non-GCC MENA MENA

Challenges faced by SMEs in securing Bank Credit

� Lack of Collaterals & Guarantees Most SMEs are unable to provide

guarantees or collaterals required forbank financing

There is no legal framework forcollateral registry and legalenforcement in cases of default

� Preference to large corporates for extending credit line Compared to large corporations, GCC

banks apply stringent selectioncriteria when dealing with SMElending

� Lack of reliable information about SMEs Lack of business related information &

non-availability of audited financialinformation

This leads to higher operating andfinancing cost in procuring loans asmore resources are required forprocessing SME loan applications

Key Highlights

MARKET OPPORTUNITIES – Saudi SME Sector overviewAccess to conventional bank financing by SMEs in KSA is extremely challenging, thereby presenting a huge

opportunity for SME focussed lending institutions in the region


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Source: Heart & Mind Strategies Research

Government linked SMEs support Schemes in KSA Outstanding Partial Credit Guarantee (PCG)* as % of GDP, 2008-09

Govt. linked–SME Support Programs

Services Provided

SIDF-Kafala Loan guarantees of up to 80%

Saudi Credit & Savings Bank (SCB) Loans to entrepreneurs & SMEs

Bab RizqJameel CenterLoans to start-ups and micro-finance, training & advice

RiyadahSubsidized loans, training, advice

Continental FundSubsidized loans, training, advice

Targeted vs. Actual bank financing* to theSME Sector (as % of the total bank financing) - 2011 � Though KSA government has initiated several schemes and

programs to facilitate credit availability for SMEs, the gapbetween targeted and actual funding still remains significant

� A number of countries in the MENA region have introducedschemes to facilitate funding for SME, but in KSA, they havenot yet been able to gather momentum evident by its lowratio of 0.02% in 2009

� SIDF was assigned to manage SME Guarantee FinancingProgram (Kafala) in 2006 with the support of Ministry ofFinance and Saudi Banks

� Notably, SIDF has issued guarantees to just over 3,000 SMEsunder the Kafala Program during 2006-2011 as against700,000 SMEs in KSA

24

.7%

25

.3%

30

.6%

29

.4%

15

.7% 8

.9%

5.2

% 10

.4%

16

.1%

23

.8%

15

.3%

1.7

%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Egypt Jordan Lebanon Morocco Tunisia SaudiArabia

Target SME Lending Actual SME Lending

Source: World bank

*Banks Target financing figures are based on the joint survey of the World Bank

and the Union of Arab Banks in January 2011

0.0

8%

0.0

7%

0.8

4%

0.3

5%

0.3

9%

0.0

1%

0.0

9%

0.0

7%

0.8

7%

0.4

1%

0.5

0%

0.0

2%

0.00%

Egypt Jordan Lebanon Morocco Tunisia SaudiArabia

2008

2009

Source: World Bank

*Partial Credit Guarantees (PCGs) cover private lenders against all risks during a

specific period of the financing term of debt for a public investment

MARKET OPPORTUNITIES – Saudi SME Sector overviewDespite KSA government’s SME support schemes, Saudi SMEs haven’t been able to secure sufficient funding for

expansion........

Key Highlights


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Key provisions contained in the new law

� Required minimum capital: For a finance companycarrying out only microfinance activity (loans up toSR50,000), capital of SR100,000,000 is required

� Maximum aggregate financing: The aggregatemaximum financing offered by a finance company shallnot exceed 3 times the capital and reserves for carryingout other finance activities (unless explicit approval bySAMA is obtained to raise to 5 times)

� Financing without collateral : The finance amountdoes not exceed (SR100,000) one hundred thousandSaudi riyal. In all cases, the total financing grantedwithout collateral shall not exceed 10% of the capitaland reserves of the finance company

� Collateral: The aggregate value of collateral mustcover the expected exposure and be no less than thetotal amount of finance

� Issuance of securities and Sukuk: In accordance withthe provisions of the Law, the finance company mayissue securities or Sukuk only after obtaining a noobjection letter from SAMA

~3000 active private lenders

Few activelenders

Current Scenario

Industry Outlook

� In 2012, the Saudi Council of Ministers issued new law for regulation offinancing companies which is expected to significantly impact thefinancial markets in the region

� The new law will trigger consolidation in Saudi private lenders market.Around 3,000 active private lenders in Saudi Arabia will be required tocomply with the new regulation

� In such scenario, small private lenders will find it difficult to adhere to allthe regulations and might end up closing down their operations or sellingthemselves to other big lenders

� Closure of small private lenders will result in market share gains for

larger and complied financial institutions

Impact of new regulations

MARKET OPPORTUNITIES – Saudi SME Sector overviewThe new regulations on supervision of finance companies will lead to industry consolidation which will result in

market share gains for large lending institutions


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MARKET OPPORTUNITIES – Saudi SME Sector overviewRegulatory barriers will restrict the entry of smaller lending institutions (with limited capital and lack of adequate

expertise)

Entry Barriers

Capable ManagementRequirement of experienced management specialized in alternative SME financing business model

Processes ComplexitySophisticated technologies are required for alternative financing operations including underwriting models, risk management techniques, servicing/collection processes

Capital RequirementRelatively large capital is required to commence origination process and fund start-up costs

Regulatory RequirementsThe new regulations on supervision of finance companies will lead to country-wide industry consolidation and expected to drive some of the existing small players

Legal AmbiguityExistence of certain ambiguity around license requirements under the new law shall hinder the entry of new incumbents in the region

Entry Barriers

Capable ManagementRequirement of experienced management specialized in alternative SME financing business model

Processes ComplexitySophisticated technologies are required for alternative financing operations including underwriting models, risk management techniques, servicing/collection processes

Capital RequirementRelatively large capital is required to commence origination process and fund start-up costs

Regulatory RequirementsThe new regulations on supervision of finance companies will lead to country-wide industry consolidation and expected to drive some of the existing small players

Legal AmbiguityExistence of certain ambiguity around license requirements under the new law shall hinder the entry of new incumbents in the region

There exists a number of barriers that will restrict the entry of new small-sized players in the KSA lending marketespecially with the implementation of the new SAMA regulatory regime


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MARKET OPPORTUNITIES – Saudi Company Growth ProspectsFocussed SME lenders are expected to exploit the SME lending business opportunities in the Kingdom and generate

attractive returns to the investors

Large under-served SME Sector

In 2012, KSA SME sector contribution was only 33% of GDP, implying huge growth potential for equitable economic growth and job creation in the region

Large under-served SME Sector

In 2012, KSA SME sector contribution was only 33% of GDP, implying huge growth potential for equitable economic growth and job creation in the region

Industry Attractiveness

Encouragement from the Government, stifferregulatory requirements for finance companies,large capital needs and limited technical expertiseamong existing players are expected to providegrounds for sustained growth of SME lenders forextended periods of time

Industry Attractiveness

Encouragement from the Government, stifferregulatory requirements for finance companies,large capital needs and limited technical expertiseamong existing players are expected to providegrounds for sustained growth of SME lenders forextended periods of time

Industry Consolidation

The new law issued in 2012 is expected to triggerindustry consolidation driving out smaller lendingcompanies. This will provide opportunities for largeexisting and new players to reap significant marketshare gains

Industry Consolidation

The new law issued in 2012 is expected to triggerindustry consolidation driving out smaller lendingcompanies. This will provide opportunities for largeexisting and new players to reap significant marketshare gains

Minimal Bank Lending

Saudi Arabian banks have one of the lowest SMElending rates in the GCC region. Minimal banklending in KSA are going to provide an optimalscenario for serving huge SME market paving wayfor rapid growth of new entrants

Minimal Bank Lending

Saudi Arabian banks have one of the lowest SMElending rates in the GCC region. Minimal banklending in KSA are going to provide an optimalscenario for serving huge SME market paving wayfor rapid growth of new entrants

Growth Prospects

The below mentioned factors indicate promising growth prospects for SME lending companies in Saudi Arabia. A focused SMElender with a developed business model is in the best position to exploit the prevailing business opportunities and provide

ATTRACTIVE RETURNS to the potential EQUITY INVESTORS

Documents

Sample - Saudi SME Sector - Saudi SME Sector.pdf · Popular SME definition in KSA Saudi Arabia SMEs share in total number of firms In Saudi Arabia, information related to the financial