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Risky business

Risky business

Small businesses are on the rack, while lenders are back to high-risk customers. Kipp finds that the credit woes of SMEs could wreck entire global recovery – from MENA to the US.

August 8, 2010 12:31 by

“Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges,” Bernanke said in July. “The formation and growth of small businesses depends critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult,” he added.

While major banks eased their access to credit in the first quarter of the year, the recipients were largely big firms. At the local level in the US, small banks have tightened lending policies. This is bad news for small businesses, which typically look to obtain credit from their local lenders. This in turn could be bad news for the wider US economy. Small businesses are “central” to tackling unemployment, Bernanke said, warning that too little is being done to ensure that financially sound companies can obtain loans.

The warnings chime with those in the Middle East and North Africa region. According to Emirates 24-7, access to finance for small and medium enterprises (SMEs) is more constrained in the MENA than other emerging markets. The website reported this week that figures from the World Bank show lending to SMEs accounts for only 2 percent of total loans. (UAE banks top the list in the GCC by giving 4 percent of total loans to the SMEs. Saudi Arabia, Kuwait and Oman lend only two per cent each to small businesses, the report said. Bahrain and Qatar lend the least to SMEs, with 1 percent and 0.5 per cent of total loans respectively.)

It doesn’t take an economics degree to see the fundamentals at work here. If fiscally sound small businesses are the solution to unemployment, then they must have access to the credit they need to put people to work. This will stimulate the banking environment, which profits on making sound loans.

“Lending to creditworthy borrowers is in their [the banks’] interest, Bernanke said. “That’s how they earn their profits.”

Signs point to easier access to credit for big firms, home loans, and credit cards. But that key player in sustaining the recovery, however, is lagging behind. Local banks must be provided the incentives and safeguards they need to follow suit. Small loans are the foundation for a robust recovery, by stimulating small business and putting people to work.

The crux of the matter, according to the Fed chief, will be for lenders to figure out how best to “assess the credit quality of businesses in an uncertain and difficult economic environment.”
The good news, at least from a regional perspective, is that, “Banks regard the SME segment as potentially profitable, and most banks are already engaged in SME lending to some degree,” says Roberto Rocha, the World Bank’s Senior Advisor in MENA. “Bank targets for SME lending are significantly higher than current lending, indicating a significant potential supply side response if constraints can be eased.”

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