SMEs being given a faster horse, when they need a car
Small and medium-sized enterprises (SMEs) form the backbone of any economy. This is particularly true in the Middle East, where they make up a significant portion of the business landscape. Despite their importance, SMEs often face significant challenges in obtaining the financing they need to grow and succeed. Technology-driven solutions like real-time transfers and electronic payments are great but don’t address their fundamental need: access to credit.
It seems like financial institutions are offering SMEs a faster horse, when what they really need is a car.
In this article, we’ll explore why SMEs in the Middle East, particularly in the retail sector, are in dire need of embedded finance solutions, and how these solutions can help overcome their financial constraints and grow their businesses.
SMEs in the Middle East face a range of financial constraints that limit their ability to grow and succeed. One of the most significant of these is a lack of access to credit. According to the International Finance Corporation (IFC), SMEs in the Middle East and North Africa (MENA) face some of the highest funding gaps in the world. Just 20% of SMEs receive credit from formal financial institutions; and with the traditional B2B trade market estimated to be $1.8 trillion in 2021 by the World Bank, these two statistics alone point to an enormous gap of SME credit in the region.
In reality, many SMEs end up relying on supplier credit, which can vary depending on a supplier’s capability and appetite for functions such as credit control and collections. The general lack of access to trade credit makes it difficult for SMEs to purchase inventory, hire new employees, or expand their operations. This is particularly prevalent in the retail sector, where an SME’s turnover is often limited by its ability to purchase and hold inventory.
Another major challenge facing some SMEs in the Middle East, particularly those reliant on B2B sales, is long receivable payment cycles from their clients. SMEs often have to wait 60-90 days or more to receive payment for goods or services they’ve delivered. This makes it particularly difficult for them to manage their cash flow, pay their employees and suppliers and invest in new opportunities.
Embedded Finance (EF) is a solution that addresses these financial constraints and can provide SMEs with the funding they need to grow and succeed. EF solutions allow SMEs to access credit and use it to purchase inventory and fund their working capital needs more efficiently than they would have done normally.
SMEs’ access to funding has been limited across MENA, and the GCC in particular. It has been a constant challenge for SMEs, with financial institutions uninterested or unwilling to provide liquidity to a large fragmented book of ‘smaller’ clients.
With the technology underpinning EF solutions, lenders are now able to cost efficiently manage who they lend to: from automated credit decisioning to disbursements. This has enabled the re-packaging of traditional forms of funding, making it easier for SMEs to borrow while making it cost effective for lenders to manage their risk of unsecured lending. This has also had a knock-on effect of democratizing the lending pool to include non-bank financial institutions, but more on that later.
EF solutions provide SMEs with greater visibility into their cash flow, making it easier for them to manage their finances and make savvier decisions in real time, with regards to allocating resources and growing their business.
The benefits of EF solutions for SMEs in the Middle East are clear. By providing SMEs with faster access to financing, EF solutions can help them overcome their financial constraints and grow their businesses. Here are just a few of the benefits that EF solutions can provide:
- Improved access to credit: EF solutions provide SMEs with access to financing even if they have limited credit history or are unable to obtain credit from traditional lending institutions. This can help SMEs overcome the financial constraints that have limited their growth in the past.
- Increased visibility into cash flow: With real-time information on their finances and payments, SMEs can have a clearer picture of their cash flow, making it easier for them to manage their finances and invest in new opportunities.
- Strengthened relationships with suppliers: Closed-loop payment systems with embedded finance are able to shift the burden of credit away from the supplier, thereby ensuring timely payments and a strengthening of buyers’ relationships with their suppliers.
SMEs face significant financial constraints that limit their ability to grow and succeed. While faster electronic payment solutions can certainly help, they don’t address the fundamental need of SMEs: access to credit. Embedded Finance (EF) solutions, on the other hand, provide SMEs with the financing they need to overcome their financial constraints and grow their businesses. By providing faster payment cycles, lower financing costs, improved access to credit, increased visibility into cash flow, and strengthened relationships with buyers, EF solutions can help SMEs overcome their financial challenges and succeed in the long term.
Middle Eastern SMEs need more than just a faster horse – they need a car. They need access to credit, and EF solutions can provide this easily, faster and more cost effectively for both the borrower and lender. By addressing the financial constraints that have limited the growth of SMEs in the past, EF solutions can help SMEs overcome their challenges and succeed in the future.
International Finance Corporation (IFC). (2020). SME Finance in the Middle East and North Africa: Overcoming Challenges to Unlock Potential. https://www.ifc.org/wps/wcm/connect/region__ext_content/regions/mena/resources/sme-finance-in-mena-report-2020
Supply Chain Finance Community. (2020). What is Supply Chain Finance (SCF)? https://www.EF-community.com/what-is-EF/