Post on 13-Aug-2020
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
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Government Plan - Jordan 2025
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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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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