80242 March 2013 . Number 88 DEVELOPING MICRO, SMALL & MEDIUM ENTERPRISES IN JORDAN: THE ROUTE TO SHARED PROSPERITY jobs.2 There are around 150,000 registered Sahar Nasr and Yara El Abd1 enterprises in Jordan and MSMEs account for over 99 percent. The majority of jobs are Introduction - Inclusive Economic Growth: A generated through MSMEs, employing around Key Priority for Jordan: The Arab uprisings 71 percent of private sector employees, with and the global financial and economic SMEs accounting for 32.7 percent and 38.7 slowdown have negatively impacted the percent for microenterprises. MSMEs are also a Jordanian economy and highlighted demands leading source of exports in Jordan and play a for a more level economic playing field and key role in the shift to high-value growth equity in access to economic and social sectors. This is initially achieved through opportunities. Already challenged in providing enterprise creation and then through provision jobs to the more than 60,000 youth who enter of services and inputs, and increasing the labor market annually, Jordan has seen productivity by adopting and applying unemployment rising. Youth and women were innovations. most affected, with unemployment, reaching 22.8 percent and 22.3 percent, respectively. Moreover, regional disparities continue to pose additional challenges. Limited private sector jobs are available in the outlying governorates, where employment relies largely on the civil service and other public sector jobs. At the same time, the private sector is hampered by difficulties in the business environment and inadequate access to finance. Job creation and economic inclusion are key priorities for Jordan today—these goals will be advanced by improving access to finance, enhancing competitiveness, and fostering sustainable, private sector-led growth. To face Source: Investment Climate Survey 2012, The World Bank the central challenge of unemployment, it is critical to promote private sector investment Access to Finance for MSMEs in Jordan : and encourage fast-growing micro, small and Smaller firms in Jordan grow at faster rates medium enterprises (MSMEs), the most than larger ones and create more new job significant employment generators. MSMEs are opportunities; however, they are confronted major contributors to the Jordanian economy, with numerous hurdles. Inadequate access to enhancing its competitiveness and creating finance is frequently cited as one of the main constraints. Financial intermediation, in 11 Sahar Nasr and Yara El Abdi work in the Finance and Private 2 Sector Development Unit of the Middle East and North Africa SMEs are defined as those firms with between 5 and 100 Region (MNSF1) of the World Bank. This Quick Note was employees, and microenterprises as enterprises with less cleared by Simon Bell, Sector Manager, MNSF1. than five employees. general, is very low in Jordan compared to In addition to regulatory hurdles, on the supply other developing economies. Access to finance side, few banks have established dedicated is substantially more of a challenge for MSMEs SME departments or have the capability to lend than it is for large firms. The financial system is to SMEs. Several banks rely primarily on dominated by the banking sector, which is less collateral-based lending rather than competitive and plays a limited role in financial creditworthiness, leaving creditworthy SMEs intermediation, compared to other MIC unfinanced. Most loans require collateral, equal countries.3 Enterprises often resort to the to approximately 23 percent more than the loan informal sector or family and friends for amount, with small firms reporting to be needed finance (Figure 1). Private sector credit- providing higher collateral than large firms. to-GDP is relatively low at 80 percent, which is Moreover, the enforcement of basic contractual largely allocated to large corporations. rights is cumbersome, time consuming and costly, representing a significant disincentive The Jordanian Banking Sector and Access to when lending to SMEs. To address this issue, Finance issues: Banks are the principal source several Jordanian banks use internal rating of external finance for SMEs, yet, only 11 systems for SME lending based on a financial percent of bank lending goes to SMEs, and qualitative analysis of SMEs. However, compared to 25 percent in emerging markets. banks often use outdated techniques that do The 2012 Jordan Investment Climate Survey not effectively help in risk management or in (ICS) shows large disparities in terms of access lowering costs. Another challenge revealed by to credit by size of firms. Only 27 percent of the World Bank’s recent enterprise survey small firms have a loan versus 38 percent of (2012) is that SMEs often refrain from applying medium-sized firms and 53 percent of large for bank loans due to their religious discomfort corporates (Figure 2). In terms of physical with interest-based borrowing. There has been outreach, overall branches are distributed in a growing demand for Shari’a compliant line with the population, although financial products in Jordan, however, these are Governorates such as Irbid and Zarqa, both of offered by only a limited number of banks. which have active SME populations, are relatively less well served by bank branches On the demand side, MSMEs do lack necessary compared to Amman. business skills. They often do not have sufficient knowledge of financial products on offer and when they do, they do not always have the skills to fill out loan application forms. Furthermore, they usually lack the funds to have audited financial statements or the collateral for a loan. Recent Reforms to Develop MSMEs: Despite these challenges, there is, nevertheless, potential for growth of the MSME sector in Jordan. Jordanian authorities have recently made significant strides to improve the enabling environment for MSMEs, including steps to improve SMEs access to finance. Key steps that have been taken include:  Strengthening the capacity of financial Source: Investment Climate Survey 2012, The World Bank institutions, banks, and Non- Governmental Organizations (NGOs)- 3 There are 26 commercial banks, including four Islamic MFIs, to enhance MSMEs access to banks, offering Shari’a compliant products. At the same finance. time, non-bank financial institutions (NBFIs) are underdeveloped and are playing a limited role in financial intermediations. March 2013 · Number 88· 2  Finalizing a partial guarantee scheme  Entry of new Islamic banks to cater the with the US Overseas Private growing needs for Sharia compliant Investment Corporation (OPIC), which products. was led by the Ministry of Planning  The Association of Banks in Jordan has and International Cooperation, aiming also developed a directory of products at improving access to finance for and services provided by banks medium enterprises. operating in Jordan with a specific  Preparing a National Startups and section dedicated to MSME products. MSME Strategy, that is led by the  Issuance of “Treating Customers Fairly Jordan Enterprise Development Instructions�, which aims at enhancing Corporation (JEDCO). consumer protection.  Improving the business environment for SMEs, especially fast-growing The building blocks above have contributed to innovative ones through regulatory MSMEs growth and expansion in Jordan, and reforms related to red tape, etc. resulted in the emergence of a more positive  Approving basic mobile phone enabling environment, which should help these payments, and the enactment of its enterprises in contributing to job creation, and guidelines. overall economic growth.  Working on adopting a comprehensive secured transactions law and the World Bank Lending Support to MSMEs in development of a collateral registry. Jordan: The World Bank is committed to this  Under a new revitalized management, sector, most recently through the Jordan MSME the Jordan Loan Guarantee Development for Inclusive Growth project which Corporation (JLGC) has refocused its provided a US$70 million loan to the attention on SME lending, developed a Government of Jordan in 2013. The project aims new Islamic product, and signed new at contributing to the improvement of access to agreement with three banks to extend finance for MSMEs in Jordan. Through guarantees to their SME lending. improved financial intermediation, the project  Strengthening the financial institutional enhances the creation of private sector job infrastructure, including, lowering the opportunities, contributing to inclusive threshold for reporting to public credit economic growth and supporting poverty registry. eradication efforts. Governorates outside  In the process of establishing the first Amman were given special emphasis to private credit bureau that would help promote growth in these districts to address the in improving banks financial issue of regional disparities. intermediation, and enhance the accuracy and timeliness of the The Project will also enhance the banking information on client credit worthiness. system’s capacity to evaluate the effectiveness  Issuing Circular No. (10/5/436) dated of its MSME support; improve the incentives 2011, setting a standard definition for for banks to expand into MSME lending; SMEs. incentivize and support the design of new  Modernizing the reporting and financial products, including Islamic products; monitoring system for banks. and ensure better opportunities for rural and  Enhancing the capacity of banks to underprivileged areas to meet citizens’ needs enable them to increase their share of and establish income-generating projects for lending to the MSME segment through sustainable and balanced development. adopting more advanced transaction- Moreover, the project will contribute to lending techniques. achieving inclusive growth through addressing  Licensing of new bank branches in gender disparities Women suffer more from Governorates that were underserved to constrained access to finance compared to men reach out to the marginalized segment and the project aims to mainstream gender both of enterprises. through its main component as well as by March 2013 · Number 88· 3 specifically targeting women through its Box 1: Women’s Access to Finance in innovative sub-components (Box 1). Jordan-Supporting Gender Mainstreaming The female labor force participation rate in Jordan Moving Forward: Additional steps are needed is among the lowest in the region and in the to strengthen develop the MSME sector in world, at around 15 percent. The situation is Jordan. Banks and other financial institutions particularly difficult for young women, whose need to develop a more sophisticated approach unemployment rate is 36 percent compared to 19 percent for young men. Young women account to SME financing, with specialization in market for only nine percent of the economically active segments, and the introduction of products population. Moreover, regional disparities persist, such as factoring and start-up or risk finance. as Jordan lags behind in female representation in The Government and financial regulators need employment in nonagricultural sectors. to support financial institutions with effective While access to finance remains a business supervision. Also, regulators need to develop a constraint for both men and women, evidence suggests that women face higher hurdles, more effective framework for consumer particularly for those who own MSMEs. Women protection as more microenterprises and SMEs suffer more from constrained access to finance make greater use of the new financial services. compared to men in the cost of finance, in gaining approval for financing, or in legal disputes and The World Bank is working closely with the conflict resolution in case of bankruptcy. In Jordanian authorities and stakeholders in addition, banks request stricter collateral meeting the aspirations of the people for equal requirements when dealing with women who are perceived as higher risk. Women often have access and opportunities, as well as improved difficulty in providing collateral. Although the standards of living and maintaining social law gives women ownership rights they often lack stability in previously marginalized areas and independence in managing these assets. In the among the underserved segments of society. credit market, limited access by women precludes learning about their potential performance as borrowers, including their ability to repay. Social norms exacerbate this problem. Through its gender mainstreaming, the MSME Development for Inclusive Growth Project will contribute to promoting women’s economic empowerment. This is especially important in the microfinance sector, as women entrepreneurs account for 71 percent of all microfinance clients. The project both mainstreams gender through the main components, as well as, directly targets women through some innovative sub-components such as designing new products that target women, encouraging banks to have special windows for women, especially in the marginalized governorates where there are more social barriers. Other new products such as Islamic financing will also significantly benefit women. Enhancing the active participation of women in entrepreneurship activities and giving them access to markets is essential, as it leads to a rise in the number of economically active members in the society and will ultimately result in long-run economic prosperity. March 2013 · Number 88· 4