The Mediterranean Middle East and North Africa 2018

Chapter 3. Fostering access to finance

Abstract

Access to finance is an area where significant progress has been achieved in the MED region over the past few years. This is especially the case in terms of the legal and regulatory framework for access to finance, where a number of credit bureaus and registries of moveable assets have been established, and where secured transactions laws have been passed or are in the process of being passed.

There has also been progress in terms of the expansion of sources of finance for SMEs and entrepreneurs, although here it is less evident how this has resulted in increased funding and whether there will be a greater role for private actors in the future – namely privately-owned credit guarantee schemes, business angel investments and private equity vehicles.

This interim assessment puts forward the following actions for MED economies:

Continue bridging information asymmetries through the creation and expansion of credit registries and, more notably, credit bureaus. Credit bureaus are especially useful because 1) they are managed by private actors and 2) they draw on more diverse sources of information than credit registries (utilities, consumption credit, microfinance institutions, etc.).

Increase efforts to create registries of moveable assets. This is important for entrepreneurs and SMEs lacking real estate to pledge as collateral, and particularly relevant for potentially innovative firms which may rely on intangible assets such as trademarks, patents and intellectual property.

Continue expanding the diversity and reach of different sources of finance (credit, equity and hybrid instruments) and include strategies for developing competitive markets in this area so that the state eventually steps out in favour of private actors.

Improve the monitoring and evaluation of the impact of reforms for access to finance. Joining the OECD Scoreboard on Financing SMEs and Entrepreneurs, which contributes to filling the knowledge gap in SME finance trends and conditions, would be an important step in this direction.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Access to finance is one of the critical pillars of policy on SMEs and entrepreneurship. By facilitating access to external finance, governments can help businesses meet their capital needs, handle cash-flow cycles, expand their business capacity, and address many other needs.

As in other regions in the world, SMEs in MED economies experience bigger obstacles than large enterprises in accessing external sources of financing. Some of these obstacles are related to structural problems concerning SMEs’ managerial capacities, such as unclear business planning, weak accounting practices and bookkeeping, low financial education and low integration in the formal economy. Other obstacles stem from information asymmetries between credit providers and SMEs, moral hazard and high transaction costs. Deficient regulatory and legal frameworks, underdeveloped financial and banking systems also limit the credit supply.

In MED economies, bank lending – the main source of formal finance – is constrained by the relatively poor quality of the legal and regulatory environment, the limited depth of financial markets, and lack of competition among banking and financial institutions. Alternative sources of finance – such as leasing, factoring, mezzanine financing or the provision of equity capital – remain underdeveloped.

Facilitating access to finance for SMEs requires a holistic and multi-dimensional approach that combines the efforts of public authorities, local and international financial institutions, banks and private firms. Addressing financial market inefficiencies can increase the potential of firms to be created, grow and survive. This chapter focuses on key reforms and actions taken since the SME Policy Index 2014 in terms of the legal and regulatory framework for access to finance, particularly the existence of two tools for addressing information asymmetries in access to bank credit: credit information systems (public credit registries or private credit bureaus) and registries of moveable assets. The chapter also looks into the availability of sources of external finance, notably credit but also equity investments.

Table 3.1 summarises the information in this chapter, which overall finds positive to very positive developments on access to finance in all MED economies.

Table 3.1. Overview of fostering access to finance

	Credit information systems (credit registries and bureaus)	Registries of moveable assets	Other measures to improve access to credit	Reforms to facilitate access to equity and other sources of finance
Algeria	Relative expansion of credit registry and no credit bureau yet	No registry of moveable assets	No	A Wilaya (governorate) Investment Fund continues to operate
Egypt	Credit registry and credit bureau function	New initiative for the creation of registry of moveable assets, building on the 2015 Moveable Security Law	Injection of funds by the Central Bank	Working towards the establishment of venture capital for early-stage firms and for distressed but viable SMEs
Israel	Credit registry and two credit bureaus	Registry of moveable assets operational	Creation of a committee to reinforce competition in the banking sector	Several reforms on easier IPOs, P2P lending and creation of two new equity funds for medium-sized firms
Jordan	Credit registry and a new credit bureau	Recent registry established but not yet fully functional	Expansion of credit guarantees by the JLGC	Some reforms ongoing but pending the approval of the Companies Law
Lebanon	Credit registry but no credit bureau	No registry of moveable assets	Injection of funds by the Central Bank	Several new initiatives focusing on start-ups and innovative firms
Morocco	Expansion of the services of credit bureau and opening of a new credit bureau	Draft proposal to reform the law on moveable assets	Several measures by banks and government	No evidence
PA	Fully functioning credit registry but no credit bureau	Registry of moveable assets operational	Introduction of a Secured Transactions Law	New VC funds, although there is no formal legal framework
Tunisia	New credit registry for microfinance; expected creation of a credit bureau	Ongoing reform of the registry of moveable assets	Administrative instruction to develop a credit rating scheme	Collective Investment Code pending approval

Most MED economies have undertaken important initiatives in the past few years to improve the regulatory framework for access to finance.

The regulatory framework for access to finance plays a crucial role in encouraging lenders and investors to provide the capital that SMEs and entrepreneurs need to start up, continue and expand their businesses. This entails 1) the development of adequate systems that facilitate the flow of information between lenders and borrowers, and that support the pledging of collateral other than immoveable assets such as buildings and land; and 2) the existence and application of laws that determine the rights and obligations of lenders and borrowers, investors and investees.

Credit information systems can help to tackle information asymmetries that are especially relevant for SMEs and entrepreneurs. Credit information systems can be divided into two general categories:

• Credit registries, which are held at central banks and whose main function is to track the health of the financial system, but which can also be useful to provide information on individual loans and borrowers, including households, individuals and firms.

• Credit bureaus, which are handled by private firms and which can provide detailed information on loans and borrowers (and also households, individuals and firms). Credit bureaus can obtain their information from various sources including banks, microcredit institutions, consumer credit firms, utilities and service providers, among many others. They can also offer additional services based on the information they possess, such as credit scoring or credit ratings.

The use of moveable assets as collateral can be especially important for people and firms with no real estate – such as young people, women, or innovative firms and SMEs based on intangible businesses. Moveable assets can be patents, trademarks, merchandise, accounts receivable, etc. Registries of moveable assets allow firms and entrepreneurs to extend the diversity of collateral that can be pledged for loans. It is also necessary to have adequate secured-transactions legislation that allows the use of this type of asset as collateral while providing enough guarantees and clarity.

Finally, it is also necessary to have a regulatory framework for business angels and venture capital, crowdfunding, leasing, and others so that these markets can develop.

Progress since 2014

This interim assessment finds very positive developments in this area, notably in terms of the creation or expansion of credit bureaus and registries for moveable assets. However, except for PA and Israel, MED economies still do not perform well globally according to the Doing Business “Getting credit” indicators (Table 3.2).

Table 3.2. Doing Business indicators for Getting credit

Economy	Getting Credit DTF1	Getting Credit rank	Strength of legal rights index (0-12)	Depth of credit information index (0-8)	Credit registry coverage (% of adults)	Credit bureau coverage (% of adults)
Algeria	10	177	2	0	2.9	0
Egypt	50	90	2	8	7.8	25.3
Israel	65	55	6	7	0	71.4
Jordan	25	159	0	5	2.2	15.3
Lebanon	40	122	2	6	22.9	0
Morocco	45	105	2	7	0	25
Tunisia	45	105	3	6	26.9	0
PA	80	20	8	8	19	0
OECD	63.03	62	6	6.6	18.3	63.7

1. DTF: An economy’s distance to frontier (DTF) is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. The distance to frontier score helps assess the absolute level of regulatory performance over time. It measures the distance of each economy to the “frontier”, which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005.

Source: World Bank (2018), Doing Business.

PA has significantly improved its regulatory framework for access to credit by undertaking major reforms such as approving a new secured transactions law, creating an online collateral registry and improving its credit registry. Jordan has also made improvements thanks to the creation of its first credit bureau:

• PA continues to perform much higher than the regional average in this area. The SME Policy Index 2014 noted that the Palestine Monetary Authority (PMA) had established one of the most effective credit registries in the region, involving all banks and other financial institutions, such as microfinance institutions. Although no credit bureau has been created over the past few years, the coverage and services of the credit registry have expanded. According to Doing Business the credit registry began to distribute credit data from retailers and utility companies, increasing the wealth of information and therefore providing more complete reports.

• Important progress has also been made through the introduction in June 2017 of an online collateral registry for moveable assets hosted by the Ministry of Economy. According to Doing Business, the collateral registry is operational, unified geographically, searchable by a debtor’s unique identifier, modern, and notice-based. In addition, a Secured Transactions Law was issued by the end of 2016. According to Doing Business, the new law implements a functional secured transactions system by allowing a general description of single categories of assets and a general description of debts and obligations. The new law gives priority to secured creditors outside insolvency procedures and allows out-of-court enforcement, thereby addressing indirectly some of the shortcomings of the bankruptcy system.

• In Jordan, one of the main developments has been the creation of the country’s first credit bureau in December 2015. The new credit bureau aims to centralise and aggregate credit information on individuals and businesses – information that will be provided by financial institutions, microfinance organisations, insurance companies, and eventually public agencies such as the Jordan Enterprise Development Corporation (JEDCO). Jordan has also established a collateral registry of moveable assets; after focusing on leasing contracts during its first phase, the registry is now in the processing of becoming a full-fledged collateral registry.

• In terms of laws and regulations for venture capital and private equity, a draft law was developed but sidelined by the government. Instead, the government has approved a new Companies Law containing provisions on venture capital, but this still needs to be enacted by parliament.

In Egypt, Morocco and Tunisia there are ongoing reforms both on the institutional and on the regulatory side:

• Egypt in 2014 was already performing well in this area, having established both a credit registry and a credit bureau. The credit bureau, I-Score, issues credit reports based on data provided by banks and by the credit registry of the Central Bank. I-Score has increased the coverage of the adult population since the last assessment from 19.6% to 25.3% and has introduced a credit rating system. In September 2017, the Financial Supervisory Authority (EFSA) awarded I-Score a contract to create a registry of moveable assets.

• The government of Morocco has undertaken several measures to increase access to information and credit transparency. In 2016 the credit bureau expanded its services to include the provision of credit scores and the monitoring of portfolios and alert systems. The opening-up of the market for private credit bureaus in 2016 has led to the opening of a second bureau. There are also plans to expand the sources of information provided to the credit bureaus to include utilities and other service suppliers.

• Concerning the registration system for moveable assets – an area where Morocco has been lagging behind the rest of the region – there is a draft proposal to reform the law on moveable assets. The proposal is the product of a number of consultations taking place since 2015 and is being presented as a high priority by the National Committee for the Business Climate (CNEA), together with the reform of Book V of the Code of Commerce (bankruptcy). Notably, the proposal seeks to extend the array of goods that can be pledged when accessing credit.

• In Tunisia the credit registry has improved its services by making historical information available to individuals, whereas before it had been limited to enterprises. A credit registry for microfinance (CRM) was also created in 2016 to facilitate credit assessments. Furthermore, a new law on private credit bureaus has been developed by the government and presented to the National Assembly. The law seeks to establish a legal framework to authorise the sharing of negative and positive information on credit; establish the rights and obligations of all parties involved (credit bureau, users, consumers, etc.); and protect the right of users and enterprises to confidentiality in their information. It is expected that the approval of the law will pave the way for the establishment of the first (private) credit bureau in Tunisia.

• Additionally, a reform of the registry of moveable assets is ongoing in order to extend the array of assets that can be pledged as collateral, to allow the non-possessory security over moveable assets and rights, and to establish a general registry of moveable assets. Finally, a draft code for collective investment bodies has been developed to improve the regulatory framework for venture capital and promote these sources of funding (this draft code is currently being examined by the parliament).

Less progress has been made in the other MED economies, although they range from Algeria, which lacks the basic credit information institutions and has no regulatory framework for secured transactions, to Israel, which already had a well-developed system:

• Algeria has achieved limited progress compared to the rest of the region. The main development was the modernisation, in September 2015, of the Credit Registry (Centrale de risques) to include information about households and consumer credit. Algeria continues to have the weakest regional performance in terms of the Doing Business “getting credit” indicators.

• Israel continues to have a functioning credit registry, two credit bureaus, and a registry of moveable assets. Authorities are working to reinforce bank competition, which is seen as one of the major hurdles for access to finance for both firms and households. Other reforms are also intended to foster SME access to alternative sources of finance. For example, in October 2016 the Tel Aviv Stock Exchange relaxed its listing requirements to facilitate initial public offerings by R&D-intensive companies (thus facilitating their access to capital) in their early stages. Israel is also promoting access to crowdfunding and peer-to-peer (P2P) lending by allowing these transactions when they are ILS 1 million (about EUR 233 000) or less. Loans above that amount are supervised by the Israel Securities Authority.

• Lebanon is making the provision of information from its credit registry decentralised and faster by allowing legal and physical persons to request a credit information report from any Central Bank branch and not only from the headquarters. There is an ongoing project to develop a law on secured transactions, which would be eventually followed by the creation of a collateral registry.

For further action

Improving the legal and regulatory environment for access to finance is one of the policy areas measured in this interim assessment where good progress has been achieved regionally. This is very positive and highlights the high priority that MED economies are giving to this vital issue. It also signals the potential for peer learning since governments that have already completed some reforms could share their lessons learned to others.

Algeria and Lebanon, the economies that show a comparatively low performance in this area, could step up their efforts to enhance the availability of credit information and create a registry of moveable assets. And despite recent reforms in Jordan, Morocco and Egypt, Doing Business indicates that these economies have plenty to do to enhance their performance in the “getting credit” indicators (Table 3.2).

Many initiatives have been introduced to increase the sources of external finance; however, the state continues to be the main actor – especially in terms of credit guarantee schemes, but also in equity investments.

Businesses have different needs and funding constraints depending on a large number of factors such as the profile of the entrepreneur (age, gender, experience, etc.), the assets available to the firm (real estate, machinery, patents, intangible assets, etc.), the stage in the lifecycle of the firm (start-up, expansion, consolidation, maturity, etc.), or the risk and potential profitability of the company (traditional business, highly innovative firm, internationally oriented business, etc.). This diversity means that for a vibrant private sector to thrive, an economy has to incentivise the development of a wide array of sources of finance, including those summarised in Table 3.3.

Table 3.3. External sources of finance for SMEs

	Debt			Hybrid instruments	Equity instruments
	Traditional debt	Asset-based finance	Alternative debt
Products	Bank loans Credit lines Credit cards	Factoring Leasing Purchase order Warehouse receipts	Corporate bonds Securitised debt Private placements Crowdfunding (debt)	Mezzanine finance Subordinated loans/bonds Convertible bonds	Private equity (venture capital, business angels) Specialised platforms for public listing of SMEs Crowdfunding (equity)
Risk/return profile	Low	Low	Low	Medium	High
Characteristics	Finance regular operations, stable companies with access to collateral	Faster and more flexible terms; factoring used for trade finance	Does not dilute ownership	Turning point in business life cycle	Long-term corporate investment

Source: OECD (2017).

Progress since 2014

A large number of public and private initiatives to foster access to finance have been launched over the past few years across the region. However, there is almost no evidence on their impact, which suggests that the MED economies should dedicate more resources to monitor policy effectiveness. It is also unclear whether the introduction or expansion of sources of finance corresponds to a strategic approach in this area or whether the measures are disconnected.

• In Algeria the market for financial products continues to be dominated by public institutions, including two credit guarantees – the Credit Guarantee Fund for SMEs (FGAR) and the Fund of Guarantees for Credit Investment (CGGI) – and the Wilayas (governorates) Investment Fund, which provides venture capital (up to 49% of equity) for new firms, growth capital and business restructuring to ensure the survival of firms and the jobs they sustain.

• Egypt has undertaken a large number of initiatives to facilitate lending to SMEs, including injecting money into the banking system – via the Central Bank of Egypt’s micro, small and medium-sized enterprises (CBE MSME) lending initiative – and mandating public banks to devote at least 20% of their loans to SMEs. The authorities have also created a state-sponsored venture capital fund to invest in distressed SMEs.

• In Israel the market for credit guarantee schemes is dominated by a state actor: the Small and Medium Businesses Fund (SMBF), which is sponsored by the SME agency and the Ministry of Finance and managed by two private companies. Authorities track well the performance of this fund, which has high rejection rates in order to keep fees low and to ensure the sustainability of the fund. In terms of equity investments, two new funds have been created by the state but are managed by private companies to incentivise investments in high potential firms. This adds to an already vibrant venture capital (VC) market.

• In Jordan the credit guarantee market continues to be dominated by the state-sponsored Loan Guarantee Corporation (JLGC), which established two special funds in 2016 to provide guarantees for start-ups. The JLGC is a well-established organisation producing regular reports on its activities. Other developments regarding access to finance include the continued operation of the Governorate Development Fund (GDF), which has supported 96 projects between 2012 and 2018. However, the GDF staff has been reduced due to budget constraints. In addition, the JLGC made efforts to set up an Early Stage Venture Capital Fund, but due to funding issues it has not yet become operational.

• Lebanon’s Central Bank has given banks incentives to finance enterprises in different sectors and at very low interest rates (e.g. 1% from the Banque du Liban [BDL] to banks and up to 3% from banks to firms). First launched as a USD 1.47 billion stimulus package in 2013, this measure has been renewed for the fourth consecutive year, with an average of USD 1 billion per year. Kafalat, originally a credit guarantee scheme and now one of the most successful initiatives in the region and beyond, developed the iSME Programme to provide concept-development grants (of up to USD 15 000) for innovative projects and equity co-investments (between USD 100 000 and 1.2 million) provided alongside other capital investments by venture capital funds, holding companies, formal business angel groups and investment banks. These are just a few among many other initiatives.

• In 2016, the total activity of Morocco’s Central Guarantee Fund (CCG), both for businesses and individuals, totalled MAD 21 billion of mobilised loans (about EUR 1.9 billion), an increase of 23% compared to 2015. The CCG also created a dedicated Guarantee Fund for SMEs called “Mouwakaba.” Overall, the credit guarantee system in Morocco seems to be working well since almost 52% of firms in the Enterprise Surveys say they have a bank loan or line of credit (compared to 28.6% in the rest of the MENA region) and nearly 35% are using banks to finance investments, compared to 25.9% in MENA. On the other hand, there is no evidence of progress in terms of equity markets.

• PA has seen its market for credit guarantee schemes expand in recent years. The European-Palestinian Credit Guarantee Fund (EPCGF) and the Loan Guarantee Facility, already operational in 2014, continue to function. But two new vehicles have entered the market: the SIDA Guarantee Scheme Facility, launched in 2015 and managed by the Loan Guarantee Facility; and the Middle East Investment Initiative, focusing on SMEs and housing loans. New venture capital funds have also been established since 2014. However, no data are available on the reach and effectiveness of these measures.

• In Tunisia the main actors facilitating access to credit continue to be public institutions, notably the SME Bank (BFPME) for credit, the Guarantee Company (SOTUGAR) for credit guarantees, and the Solidarity Bank (BTS) for microcredit. Tunisian authorities are also developing a new programme, Investir PME, that aims to facilitate the introduction of SMEs to alternative markets through the stock market. As the cost of entering this market is normally high for SMEs, the new programme will focus on reducing entry barriers and helping SMEs diversify their sources of financing.

For further action

Overall, the state continues to be the main source, or at least facilitator, of access to finance for the MED region’s SMEs – through state-sponsored credit guarantee schemes and, in many cases, venture capital funds. In most cases, however, there is little evidence to show how this activism has resulted in greater access to finance for SMEs and whether measures exist to eventually foster a greater participation of the private sector in funding the different categories of SMEs and entrepreneurs.

When the state creates vehicles for equity investment in SMEs (as in Algeria, Egypt, Israel and Jordan), it is not always clear how this will eventually lead to the development of a more dynamic venture capital and business angel market in the future. Given that globally governments only make good venture capitalists under certain conditions (OECD, 2018), governments in the region should carefully evaluate the impact of their activities in this domain.

The important reforms noted in the section on the legal and regulatory framework for access to finance should eventually lead to a greater participation by private actors in this market. But this is not yet explicitly or clearly described in the evidence and discussions for this interim assessment.

The way forward

Overall, access to finance is an area where significant progress has been achieved in the MED region over the past few years. This is especially the case in terms of the legal and regulatory framework for access to finance, where a number of credit bureaus and registries of moveable assets have entered into function, and where secured transactions laws have been passed or are in the process of being passed.

There has also been progress in terms of the expansion of sources of finance for SMEs and entrepreneurs, although in this case it is less evident how this has resulted in increased funding and whether there will be a greater role for private actors in the future – namely privately-owned credit guarantee schemes, business angel investments and private equity vehicles.

This interim assessment puts forward the following additional actions for MED economies:

• Continue bridging information asymmetries through the creation and expansion of credit registries and, more notably, credit bureaus. Credit bureaus are especially useful because they are managed by private actors and because they draw on more diverse sources of information than credit registries (utilities, consumption credit, microfinance institutions, etc.). However, the case of PA shows that registries can also be effective tools for facilitating the flow of information on debtors.

• Increase efforts to create registries of moveable assets – especially in Algeria and Lebanon, which have no ongoing work in this area. This is important for entrepreneurs and SMEs lacking real estate to pledge as collateral, and particularly relevant for potentially innovative firms which may rely on intangible assets such as trademarks, patents and intellectual property.

• Continue expanding the diversity and reach of different sources of finance (credit, equity and hybrid instruments) and include strategies for developing competitive markets in this area so that the state eventually steps out in favour of private actors.

• Improve the monitoring and evaluation of the impact of reforms for access to finance. Joining the OECD Scoreboard on Financing SMEs and Entrepreneurs, which contributes to filling the knowledge gap in SME finance trends and conditions, would be an important step in this direction.

Bibliography

OECD (2018), “Are governments good venture capitalists? New cross-country evidence from micro-data”, working paper.

OECD (2017), New Approaches to SME and Entrepreneurship Financing: Broadening the range of instruments, OECD Publishing, Paris, http://www.oecd.org/publications/new-approaches-to-sme-and-entrepreneurship-financing-9789264240957-en.htm

World Bank (2018), Doing Business 2018: Reforming to create jobs, World Bank, Washington, DC, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf.