About SME lending
Small and Medium Enterprises (SMEs) have always struggled to obtain funding to meet their capital needs. According to CB Insights, not having enough capital was the most commonly cited reason for the failure of small businesses. As a result, it is no surprise that only 50% of SMEs survive past the five-year mark.
These businesses often need funding for three main reasons: to start their business, to expand their business, or to cover their day-to-day financing needs. SME lending covers a wide variety of financing options that address the funding needs of small and medium businesses. In the past, SMEs had to resort to loans from banks as they were the only viable funding alternative. However, the markets have evolved a lot since then. Today, SMEs can explore a variety of innovative financing methods, such as invoice factoring, crowdfunding, P2P lending, convertible debt, and more.
With many small business owners encountering a lengthy application process and low loan approval rates from banks, Fintechs are emerging as the leading contenders to meet the financing needs of this customer segment. Given their willingness to take on higher risks and ability to provide innovative solutions, fintechs make excellent partners for small and medium businesses.
Global SME lending market
In 2020, the worldwide commercial lending market was valued at $9.78 billion. The market is projected to grow at a robust CAGR of 14.4% between 2021 and 2028, resulting in $27.4 billion. According to the regional analysis, the Asia-Pacific is anticipated to experience the highest CAGR during the forecast period, at 16.5%.
From the global commercial lending market, the loan requirements for SMEs are expected to grow the fastest at a CAGR of 16.9%, from $3.97 billion in 2020 to $13.14 billion by 2028.
In recent years, the number of SMEs has grown, and the financing gap has only widened as these businesses still struggle to procure financing.
SMEs have a major impact on the global economy, representing 90% of businesses and over 50% of employment worldwide. In emerging economies, SMEs contribute up to 40% of national income (GDP). And that is without even factoring in the influence of unregulated/informal businesses. According to the International Finance Corporation (IFC), around 65 million businesses, accounting for 40% of formal micro, small, and medium companies (MSMEs) in developing nations, require $5.2 trillion in funding annually. This amount is 1.4 times greater than the present worldwide lending to MSMEs.
SME lending in Saudi Arabia
Market Overview
There are around 1.3 Mn SMEs in Saudi Arabia, with the number growing by an impressive 3.1% in Q4 2023. From a regional perspective, Riyadh has the highest number of SMEs followed by Makkah and SMEs in the Eastern province.
As per the latest data in the third quarter of 2023, credit provided to SMEs in Saudi Arabia grew by 18% compared to the previous year. According to data provided by SAMA, the central bank of the Kingdom, the allocation of borrowing lines to this sector experienced an increase from SR228.03 billion during the corresponding period of the previous year to SR268.57 billion ($71.61 billion) in the three months leading up to October 2023.
Competitive Landscape
In Saudi Arabia, banks form majority of the lending provided to SMEs, extending around 94% of the overall credit facilities. Monsha’at, the General Authority for Small and Medium Enterprises in Saudi Arabia, established the National SME Bank in 2021 to improve funding provided to SMEs.
Funding Gate, also known as Tamweel Gate, is a remarkable initiative by the SME Bank. It is an electronic platform that connects SMEs to both government and private lenders, allowing easy access to funding. In 2021, Saudi Arabia observed 884% year-on-year growth in SME borrowing on Tamweel (Funding Gate). Here are the top 5 lenders on the funding gate as of 2021:
SMEs should also consider venture capital as a viable funding option, among other possibilities. In 2023, Saudi Arabia emerged as the leading country in the MENA region for VC Funding, setting a new record with an impressive $1.38 billion in VC capital deployed. Between 2018 and 2023, there has been a remarkable growth in the total amount of VC Funding, with a CAGR of 85%. The total number of VC details has also experienced a steady increase, with a CAGR of 17% during the same period.
- Key Growth Drivers
- Ongoing support by the government
The KSA government has already introduced various initiatives such as reimbursement of taxes paid by SMEs to the government, the Kafalah program, the Saudi Venture Capital Program, and providing indirect funding of $426 million to banks for supporting small businesses at reduced costs. All of these moves are aimed at making funding easier for small businesses, enabling them to concentrate solely on their growth.
SAMA and Kafalah launched the Guaranteed Financing Programme in 2020 to support and improve micro-enterprises creditworthiness by guaranteeing 95% of banks’ and companies’ financing.
- Open Banking
Open banking has the potential to revolutionize the financing needs of SMEs in Saudi Arabia. Using open banking, banks share their data using application programming interfaces (APIs) to offer better-targeted products and improve the overall funding scenario for all parties involved.
With open banking, there is an opportunity to improve financing for SMEs by tapping into a wide range of data sources. These sources include transaction accounts, procurement platforms, treasury, payroll, accounting, invoicing, tax, logistics, marketing platforms, and more. Bank–fintech partnerships are gaining prominence lately. Some examples of the same are:
- Cashin’s partnership with Saudi National Bank to offer an integrated financial platform for SMEs, and
- Almina Bank’s partnership with cloud-based restaurant management solution provider Foodics
The end result is an improvement in lead generation, origination, underwriting, monitoring, and collection processes for business finance products.
- Digitalization and the Fourth Industrial Revolution
As we enter the fourth industrial revolution, digitalization becomes more important as our dependence on technology grows. New business models are emerging that were not present before, and innovation in business finance is the need of the hour for markets globally. Innovative financing models, including neobanks, crowdfunding, revenue-based finance, invoice factoring, and supply chain financing, offer lenders the ability to meet the unique needs of different businesses.
- Role of SME Lending in the overall development of Saudi Arabia
Small and medium-sized enterprises play a vital role in driving economic growth, serving as a fundamental pillar for Saudi Arabia’s economic progress and supporting the objectives of Saudi Vision 2030.
With an increase in the growth of SMEs, employment in the kingdom will increase. They are also more agile and innovative, leading to higher economic growth in the country.
The government of Saudi Arabia regards these businesses as the backbone of its economy as the country as it aims to reduce its dependence on oil. The KSA government’s dedication to supporting small and medium-sized businesses is evident in its Vision 2030, which sets a goal of raising the SME sector's contribution to GDP from 20% to 35%.
- Future of SME Lending Market in Saudi Arabia
SMEs facing financial challenges have long been a concern for the KSA government. With the emergence of new financing models, the growing support from the government, and the advent of open banking, it is expected that the funding gap will decrease.
Abount Tanmeya Fintech Fund
Several high-profile investment funds have already stepped up to address the funding gaps in the fintech sector, including Sanabil Investments and Shorooq Partners. Fintech funds launched by Tanmeya Capital also offer exposure to the growing Saudi Arabian fintech sector. Tanmeya is focused on bridging the financing gap in Saudi Arabia’s SME sector along with the support of several government initiatives. In the Vision 2030 scenario, the credit gap in the SME sector will improve dramatically from a shortfall of SAR 372 billion in 2020 to just SAR 94 billion by 2030. To offer investors attractive risk-adjusted returns through exposure to financing solutions for eligible SMEs, Tanmeya has launched the Finmal platform with a rigorous credit scoring of SMEs to evaluate the financing eligibility of SMEs. Leveraging its robust data analytics platform, the Finmal platform is designed to reduce credit repayment risk while partnering with strategic financial partners for disbursing secured loans. Finmal’s edge is its access to a massive pool of robust SME data. Funds will be deployed via their strategic lending partners for various means, including supply chain financing, POS financing, and consumer financing that help SMEs to overcome their operational financial challenges and scale beyond.
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