Jordan: Finding financing for SMEs

By encouraging banks to step up lending to private firms at favourable terms, Jordan hopes to be able to assist managers of small and medium-sized enterprises (SMEs) obtain financing for growth. With the threat of recession looming in Europe and a general slowing of the global economy, however, banks may be hesitant to loosen the purse strings.

In total, there are more than 100,000 SMEs in Jordan, representing some 97% of all companies, according to the Department of Statistics (DoS). These enterprises are core to the national economy: they contribute around 50% or more to GDP; provide employment to an estimated 60% of the Jordanian workforce; create up to 70% of new job opportunities in the economy; and account for 45% of exports, according to the Organisation for Economic Cooperation and Development.

In its latest Ease of Doing Business Index, the World Bank rated Jordan 96th overall out of 183 countries assessed. While the country scored well in categories such as getting utilities connected — where it was ranked 36th — and trading across borders (58th), its overall performance was lowered by its marks in the ease of obtaining credit category, where it was rated 150th globally.

This is a full 20 places down on its 2011 ranking, a strong indicator that Jordan’s credit market has been squeezed over the past year, with some of this pressure falling heavily on smaller businesses. The issue of resolving insolvency was also seen as a problem for businesses in Jordan, with the World Bank giving the economy a ranking of 104 for this category.

Due to a high percentage of smaller-scale enterprises failing in their first year or two of operations, such difficulties as identified in the World Bank report could promote aversion to taking risks, both by entrepreneurs and lenders. In late 2011, credit ratings agency Moody’s warned that Jordan’s banks would be operating in a challenging environment for the coming 12 months, and would have to deal with rising levels of non-performing loans contributing to subdued profit margins.

On January 24, Jafar Hassan, the minister for planning and international cooperation, called on Jordan’s banks to make it easier for SMEs to gain access to credit facilities, saying that such businesses currently get less than 10% of the loans extended by financial institutions.

In a conference on financing small businesses, Hassan asserted that with more than $4.2bn in excess liquidity held by banks, lenders should ease the criteria for making loans to SMEs, particularly as the state’s loan guarantee programme covers around 75% of the credit that is used to help SMEs to obtain funding.

The minister is not the first to urge banks to back SMEs. In January 2011, Faris Sharaf, the governor of the Central Bank at the time, asked banks to cut their rates on loans to SMEs, suggesting that a reduction of 1% on the interest charged to larger clients would promote growth. However, the uncertain economic and political climate in the region made lenders wary of extending credit.

Now, however, some lenders are heeding the calls, with a number of them signing up to a programme launched by the Jordan Enterprise Development Corporation (JEDCO) to help SMEs link up with banks and donors. The scheme, which is due to formally commence operations in mid-February, with both the Arab Bank and the Cairo Amman Bank committed to the project, is expected to see up to $283m made available to SMEs over the next three years.

According to Yarub Qudah, the CEO of JEDCO, five more banks are expected to join the programme, which has the potential to make a significant impact on the economy.

“The programme is a real and exceptional opportunity to spur economic and development growth in the Kingdom,” he said.

Among the donors providing funding for SME loans is a US-based agency, the Overseas Private Investment Corporation (OPIC), which signed a $250m loan guarantee facility for Jordanian SMEs at the end of October 2011, with the facility to be used to back loans distributed through local banks. Under the terms of the agreement, loans will be easy to obtain and process, and will be granted based on the feasibility and quality of the project, rather than collateral.

Though donor funding will assist in the growth of bank lending to SMEs, such sources can only go so far. With growing uncertainty over the global economic climate, Jordan’s banks are likely to remain cautious over increasing their exposure to a relatively risky loan market such as SMEs, at least in the short term.