EBRD JORDAN MSME FRAMEWORK INCREASING MSMES ACCESS TO FINANCE IN JORDAN WHAT THE MARKET SAYS? MR. MERT DEDEBAS 10 MARCH,2016 AMMAN -JORDAN
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)
WHY SME BANKING? - PROFITABILITY 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.
STUDY OBJECTIVES & METHODOLOGY 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 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 5
ENABLING ENVIRONMENT - DOING BUSINESS IN JORDAN Current status Government Plan - Jordan 2025 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 Topics Doing Business Index Target Ranking 2025 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 o o Restrictive labour regulations Tax regulations & rates 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. Sources: The World Bank, Doing Business Report 2015. and Jordan 2025 Blueprint 6
ENABLING ENVIRONMENT - LEGAL FRAMEWORK Current status Government Plan - Jordan 2025 SME Definition & Laws 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 Reach a unified definition of SMEs Prepare and adopt of SME law Adopt a national strategy for encouragement of entrepreneurship and development of MSMEs Start-ups The Ministry of Industry made starting a business easier by reducing the minimum capital requirement (from JOD 1,000 to 1) Reduce time to start business (No. of days) from 12 to 6 Establish a fund to support start-up SMEs Access to Credit 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 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 7
DEMAND ANALYSIS - THE SAMPLE Confidence level = 95% Total MSMEs in Jordan = 156,761 margin of error α= 5% Randomly selected sample of 416 MSMEs North Central Central Region Irbid Amman Zarqa Karak Aqaba 92 (22%) 159 (38%) 91 (22%) 34 (8%) 40 (10%) Size Micro 107 (26%) Small 194 (46%) Medium 115 (28%) Economic sector Trade 179 (43%) Services 118 (28%) Industry 124 (30%) Agriculture 47 (11%) Ownership Male 379 (91%) Female 37 (9%) 8
BUSINESS GROWTH & CHALLENGES 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. How do you see the business in 2 years? Remains stable 23.30% Decrease 15.20% Rapid decrease 1.80% Rapid increase 19.50% Increase 40.30% In the next 2 years Business will be: worse 17% Stay the same 23% Better 60% 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. What are the main challenges besides access to finance? Competition High taxes 35.7% 41.8% Poor sales 33.7% Most important plans in the next 2 years Improve sales & marketing New markets in Jordan Open additional branches Extension of product range New markets outside Jordan New equipment Lower overall costs Move to new premises Process optimisation Energy efficiency investments Enhance staff training 8% 8% 7% 15% 24% 22% 30% 28% 33% 32% 55% 0% 10% 20% 30% 40% 50% 60% Plans High rent 28.6% Unqualified labour 23.5% High energy cost 22.5% High labour cost 21.8% Political uncertainty 14.9% Government bureaucracy 13.7% Insufficient marketing 6.3% Supplier problems 4.3% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 9
ACCESS TO FINANCE - EXISTING FINANCING SOURCES Finance during start-up phase Main financing sources (besides own funds) Own fund 83% Other sources 17% What are the other sources? 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00%.00% 35.7% 19.8% 18.2% 15.0% 12.2% 13.1% 8.4% 8.9% 9.3% 6.1% 5.2% 4.2% Micro Small Medium 6.5% 2.6% 1.7% Loan from banks Clients Friends and Family Suppliers Loan from MFI 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. Reasons for loan rejection during start-up phase High debt to income ratio 15% Lack of financial documents 15% No financial track record 8% Lack of collateral 62% 10
ACCESS TO FINANCE - RELATIONSHIPS WITH COMMERCIAL BANKS With increasing business size, companies are more likely to hold accounts at several banks. Most important factors in cooperation with a bank 90% 80% 76.50% 70% 64.40% 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. 60% 50% 40% 30% 20% 10% 0% 46.50% 26.20% 20.30% 14.20% 9.90% 3.50% For micro companies, accessibility is a more important aspect, while medium enterprises put a higher emphasis on the technological infrastructure of a bank. Number of partner banks in relation to business size Total Micro Small Medium Avg. Number Of partner Banks 1.4 0.9 1.3 1.8 11
ACCESS TO CREDIT 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 Loan applications and loans outstanding (N=416) Never applied for a loan 57.7% Have applied for a loan 42.3% Current outstanding loan 24.8% No current outstanding loan 17.5% Total Micro Small Medium Loan application 42.3% 33.6% 39.7% 54.8% Loan outstanding 24.8% 17.8% 23.7% 33.0% Average loan amount according to business size (N=95) Agri Industry Trade Services Average loan amount (JOD) 75,000 340,574 84,284 221,376 N 7 34 27 27 12
DEMAND FOR FINANCIAL PRODUCTS AND SERVICES - DEMAND FOR CREDIT Are you interest in obtaining a loan Demand for loans vs. outstanding loans Not interested 28% 7.2% Non-compliance with Shariah law interested in a loan Not interested in a loan Interested 54% Interest with constraints 18% 3.7% 3.1% Repayment concerns Difficult loan process Have a current loan a go Zone Repeated borrowers 20.4% Observation Zone Currently not interested 4.3% 2.3% No collateral/ financial documents 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 No current loan a go Zone Potential new borrowers 51.4% A Hold Zone Not interested 23.8% Do you have an active loan or had a loan in the past two years? No current loan 75% Current loan 25% 13
INDICATIVE LOAN FEATURE What are the loan conditions MSMEs are looking for? 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 purpose? Total Micro Small Medium Business expansion 60.50% 62.30% 60.40% 59.10% 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. 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% 14
DEMAND FOR OTHER BANKING PRODUCTS AND SERVICES What banking services you are currently using? What banking services you would be interested to use in the future Current Accounts Payment and collection National transfers 48.7% 67.8% 91.2% Total Micro Small Medium Leasing 19.5% 15.9% 18.1% 26.8% Credit cards 48.6% Deposit/ Savings 16.2% 14.6% 16.1% 18.3% International transfers Guarantees Deposit/ savings Letter of credit Factoring Overdraft facilities 44.6% 38.1% 36.1% 27.3% 25.1% 22.2% 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% Leasing 9.7% 0% 20% 40% 60% 80% 100% 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 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% 15
DEMAND FOR NON-FINANCIAL SERVICES Use of non-financial services according to business size (N=399)* Total Micro Small Medium Business development services 59.4% 38.4% 58.2% 80.2% 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 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% 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. Professional training courses companies would like to attend (N=414)* Business Planning 38% Marketing & Sales 35% International Business 33% Information Technology 32% Operations 30% Legal & Insurance Human Resources Accounting & Finance 27% 24% 29% 0% 5% 10% 15% 20% 25% 30% 35% 40% * Several answers were possible. 16
GAP ANALYSIS Category Nr. of formal enterprises Market gap Indicative future credit demand % loan demand Average demanded loan volume (JOD) MSME portfolio of Jordanian commercial banks and MFIs in 2014 of JOD 1.76 Billion 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 17
THE WAY FORWARD For International Financial Institutions 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 Develop internal capacity o o For Commercial Banks To implement risk based loan assessment 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 18
شكرا لحضوركم ومشاركتم GRAZIE PER L'ATTENZIONE Vielen Dank für Ihre Aufmerksamkeit! THANK YOU VERY MUCH FOR YOUR ATTENTION! Mert Dedebas Frankfurt School of Finance & Management www.msmejordan.com info@msmejordan.com