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Challenges for Development of SMEs

Table of Contents (Jump to)

1. Background

2. Objectives

3. Structure of the Report

4. Methodology

1. Background

There is a growing recognition among policymakers across the globe that small and medium enterprises (SMEs) have a significant role to play in enhancing economic growth, contributing to economic diversification and employment,alleviating poverty and reducing inequality. SMEs create jobs and foster growth, contribute to political stability and make a significant dent on poverty. While finance is not the only input for development of SMEs, it continue to be a critical contribution for SMEs development.

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Despite the growing body of knowledge about SMEs and SMEs finance, there remainsa significant gap in the literature on how to create a competitive business, regulatory environment and growth of the SMEs and SMEs finance.In this context, the Islamic Research and Training Institute (IRTI) andWorld Bank Global Islamic Finance Development Center (WBG),in line with the respective mandates, proposed to undertakea joint study leading to a flagship report on SMEsand SMEs Finance.

2. Objectives

The proposed study will seek to develop a flagship report on SMEs and SMEs finance. The report will highlight the obstacles faced by SMEs and SMEs financing and provide new insights to overcome those constraints to SMEs development. The report will examine these issues in selected member countriesand provide policy recommendations. Thetarget audience for this report comprisesof stakeholders inmembers and non-memberscountries including Islamic financial institutions, as well as conventional financial institutions, regulators, policymakers, SMEsassociations, multilateral institutions, academiaand standard-setters in both the World Bank and Islamic Development Bank.The report will also contribute to the policy debate through the discussion of a series of strategic recommendations provided in the report.

The specific objectives of the report are as follow:

  • To examines how regulators perceive thedevelopment of SMEs and SMEs finance i.e. the drivers and obstacles pertaining to SMEs regulation and financing;
  • To provide new insights and identify actions that could be undertaken by authorities and other relevant policy makers to improve SMEs access to finance.

3. Structure of the Report

TheSMEs Report will have an overview, four main chapters and a statistical Appendix. Chapter 1 will provide a systematic review of the regulations that governs SMEs and SMEs Islamic financing in selected countries mainly in the GCC countries and leading countries in Islamic finance. Chapter 2, 3, 4 and 5 will provide new insights on SMEs development and improve SMEs access to finance.

Table 1. SMEs Finance Report: Proposed Structure

Chapter Objectives and Contents
1. Introduction Challenges faced by SMEs vary across countries due to differences in the level of development, degree of human development, efficiencyof governance, and the political situation in the respective countries.The biggest challenge, however, is access to finance. SMEs at various stages of development face severe challenges when accessing finance. Concerns include prohibitive interest rates, high collateral rates, and procedural hurdles in applying for a loan.

In addition, among the main factors affecting bank financing for SMEs, are the macroeconomic environment, the legal and regulatory framework, the state of the financial sector infrastructure, bank-internal limitations in terms of capacity and technology, and SMEs specific factors, particularly the SMEs landscape in terms of number, size, and focus of operation, as well as the opaqueness of information.

This chapter will provide the motivation, structure and background of the paper. The chapter will also include the summary of the main findings and policy messages of the report.

2. SMEs Regulatory Environments Government has a very important role to play in the development of its SMEs sector by providing both financial and non-financialsupport to promote SMEs.A favourable regulatory environment for SMEs play a significant role in contributing to SMEs operational performance and growth in many developed and developing countries. An effective regulatory framework will promote competition, while restrictive regulatory environment will adversely affect SMEs. The regulatory framework may also have an impact on the incentives of banks’ leading to SMEs.

This chapter will provides a systematic review of the regulations that governs SMEs and SMEs Islamic financing in selected countries. A survey will be sent out to regulatory bodies in selected countries to gauge views on issues revolving SMEs and SME finance. In addition, this section will also address a number of key issues on SMEs from regulatory perspectives as follows:

  • Do SMEs need a regulatory framework?
  • What aspect should be covered in the SMEs regulatory framework?
  • What are the effect of rules and regulations (i.e. economic, structural etc.) on SMEs growth and financing?
  • How do we harmonize the different regulatory frameworks governing institutions in different jurisdictions? Is there a need for such harmonization? If so, how do we develop a unified and integrated framework for the SMEs?
  • Should there be a cap on the size of SMEs?
  • Should SMEs financing be made compulsory? Alternatively, should there be an incentive based regulatory framework to induce the practice of SMEs? If so, what would be the best way to propagate such a framework?
  • How to establish an effective internal supervisory framework in relation to SMEs?
3. Internal Markets To be discussed with the World Bank
4. Digital Platform To be discussed with the World Bank
5. Ratings To be discussed with the World Bank
6. Movable Collaterals To be discussed with the World Bank
7. Conclusion and Recommendation Based on the analysis of the fourchaptersabove, this chapter will make policy recommendations with respect to SME development and effects of accessing finance on SMEs. The policies will be based on a holistic consideration of the realities in particular pertaining to Islamic FIs and seek to enhance the reach of Islamic FIs in meeting the financing needs of the SMEs.

4. Methodology

This report was prepared using a mix of desk research and primary survey/interviews with industry participants and subject matter experts, including banks,government organizations, small and medium enterprises, and SMEs associations.Key elements of the methodology includes:

  • Expert inputs, including drafting the report by the core teams from the World Bank and IRTI;
  • A survey on the state of the industry; data collection from governments, banks, supervisory bodies, SMEs and SMEs associations;
  • Expert review by the World Bank, IRTI, and other relevant subject matter experts;
  • A series of interactive presentations and roundtable feedbacks, which will aim at soliciting constructive comments from key stakeholders at different forums and roundtables before finalization of the report;
  • Final report will consolidate the views of industry experts, public and private sector stakeholders.

The World Bank and IRTI will prepare the survey questionnaire and will be involved in the survey to collect information pertaining to issues on SMEs regulations.Data collection will include but not limited to indicators on SME financing opportunities, challenges, market share, Islamic finance products etc.


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