Not long ago, at the April 2019 annual spring meetings of the International Monetary Fund (IMF) in Washington DC, one of the most-touted themes was the finance of small and medium enterprises.
That a flagship event of the IMF in 2019 would highlight SME banking is not out of the norm—after all, SME finance has been a well-known concern of international financial institutions (IFIs) for decades. However, it was a bit more unusual to hear speakers at an “analytical corner” session on financial inclusion and SME access to credit in MENAP/CCA (Middle East, North Africa, Afghanistan, Pakistan, Central Asia and Caucasus) countries open their talk with describing an entrepreneur called Tony.
Tony, the IMF presenters said, was a successful Lebanese small business owner who had succeeded in obtaining an $80,000 SME loan “from a private bank in Beirut” that had enabled him to open a branch of the bakery that had been founded 20 years ago by his mother, with her “delicious recipe for making bread” (read mana’eesh). The loan allowed him to expand his staff and increase his retail sales by 50 percent.
In short, it was impressive that an SME credit access focus session at the 2019 IMF spring meetings featured a Lebanese SME example as a success story of SME lending in MENAP/CCA, although the narration was somewhat imprecise in certain details. Mabruk Tony, and mabruk his bake shop in Zalka.
SME access in the country better than its perception
From the local vantage point, it was perhaps even more memorable to see a Lebanese SME story highlighted in this context, given the unintended irony of using a Lebanese story as a shining example of small enterprises’ access to credit in a presentation that also outlines key factors—such as sound macroeconomic fundamentals and stability, and a favorable business environment—that, from IMF perspective, matter for financial inclusion of SMEs.
But when Executive drilled below negative surface perceptions—that SMEs in Lebanon have an impossible time when they want to obtain credit, or that Lebanese banks are in principle very reluctant SME lenders—we found little support for this defeatist narrative. Instead, important local banks displayed a positive approach to SME finance. For example, Shirine Beyrouti, head of the project finance and syndications unit at Byblos Bank, tells Executive: “As a commercial bank, Bank Byblos has always been keen on financing and supporting SMEs. This is in our strategy. We strongly believe that the more we can reach out and support SMEs, the better it is for the economy.”
Publications and press statements by banks and IFIs present in Lebanon testify to a growing number of funding partnerships for SMEs with alpha banks, such as Credit Libanais, SGBL, and Fransabank. The partnerships often involve the provision of facilities for on-lending but can also be in form of IFI participation in equity of Lebanese banks or/and in the form of technical support and consultancy on SME finance.
At Bank Audi, where an SME unit was created just a few years ago with consulting input from the World Bank/IMF Group’s International Finance Corporation, SME unit head Hassan Sabbah says that the banking sector in Lebanon is at 17 percent of lending to SMEs—better than the regional average of 7 percent but lagging behind developed countries. According to Sabbah, the Bank Audi Group allocated a “significant” budget for SMEs, and the bank has more than 5,000 SMEs and individuals running SME businesses who are taking loans.
“Our main reason [for establishing a dedicated SME unit] was an issue of [seeing an] opportunity, and another reason is that it is important for the bank to serve all the economic segments,” he says. “We are strong at the corporate and commercial level, and also strong at the retail level; so we wanted to establish this business line to also be strong at the SME level.”
Credit to whom it credit is due
At Credit Libanais, another alpha bank that last November entered a long-term financing arrangement with the International Finance Corporation (IFC) in form of a $50 million senior financing facility with preferential interest rates, Deputy General Manager Nada Rizkallah explains that this move was a continuation of an SME focus that had existed at the bank for more than 10 years. According to her, Credit Libanais entered its first SME financing deal with the IFC as far back as 2007, and was one of the first banks in Lebanon to support SMEs through provision of different types of loans with preferential rates and conditions. “For this purpose, the bank, throughout previous years, took advantage of the subsidy programs that were established by the central bank of Lebanon to finance SMEs among other sectors,” she says. “We also collaborated with several local financial institutions that support SME lending, such as Kafalat and the Economic and Social Fund for Development, and we collaborated with international multilateral development banks for the purpose of securing the necessary funding.”
The share of lending of their total portfolios that Lebanese banks dedicate to SMEs appears indeed substantially higher than the average share that the IMF found in the MENAP/CCA region stated in a report released in February and described in its 2019 spring meetings as the world’s lowest. Representatives of IFIs with long presence in Lebanon confirm to Executive that the Lebanese banking sector is advanced in its SME financing activities when compared to regional peer countries.
However, one has to consider additional nuances of the SME finance picture when adding in the activities of multilateral development institutions whose priorities are not necessarily the same as they are for commercial banks. Multilateral actors in development and finance provide funds to banks in the form of debt finance, meaning that a large facility is made available to commercial lenders under an agreed package. Such a package will have a cost frame comprising the interest rate that banks are paying to IFIs, and an agreed additional interest spread that banks charge when they lend to SMEs. These commercial banks are in turn obliged to use the funds provided by IFIs to lend to SMEs, plus the use and proceeds of funds have to be monitored by the IFI.
From perspectives of multilaterals that have the first priority to assist in economic growth and job creation in countries of operation, the local market conditions have been, at times, supportive of IFI participation in SME lending and yet, at other times, it would have not been helpful to provide local banks with low-interest credit lines for the purpose of onward lending to SMEs.
No simple game
There is, according to a representative of an IFI with experience in the Lebanese market who asked to remain anonymous, always demand for access to finance for SMEs in Lebanon. Though this demand has varied over the years, from the perspective of an IFI present in Lebanon it is part of its mandate to boost economic activity.
“But IFIs are not in the business of distorting markets; they are in the business of crowding in private sector lenders,” they explain. “Thus, during times when the Lebanese central bank provided certain SME segments with low-cost funding, IFIs were not able or willing to compete against this kind of subsidized lending, nor would IFIs push their offerings to commercial banks in periods when these banks lower cost of funding, and thus were willing to provide SMEs with financing tools at affordable rates.”
A next layer of difficulty resides in an ambiguity of how different banks in Lebanon define what they consider to be SMEs, and in the large number of commercial actors that fit the size and economic profile of an SME, but are part of the informal economy. “The reality is much more complex, and the lower you go in the segment in terms of turnover and size, the higher the portion of informal and non-registered companies,” Audi’s Sabbah explains.
In any case, local bankers and international officials both confirm that Lebanon is now in a phase where increased cost of funding in the Lebanese market coincides with concerns over the economy, and so banks are more cautious when judging credit risk.
A new lender in difficult times
For the European Bank for Reconstruction and Development (EBRD) this constellation in Lebanon means that its timing was highly fortuitous when EBRD opened its Beirut office some 18 months ago, as the IFI extended its presence to Lebanon at a time when bank demand for low-interest finance kicked into high gear. “I think it was fortuitous timing for us to come as the country is right now in a period of economic challenge,” Gretchen Biery, EBRD head of Lebanon, tells Executive. “EBRD is an institution that puts a lot of emphasis on private-sector developments and support of SMEs, and thus I think we are a good fit in the region and in Lebanon in terms of helping private sector developments.”
As she explains, EBRD shareholders include governments from all around the world (the US being the largest shareholder) as well as supranational institutions: the European Union and the European Investment Bank (EU and EIB). With time, the IFI widened its scope of interest to a growing number of countries in all world regions and now has 67 governmental shareholders, with Lebanon and India as the latest joiners (to be a country of operation, a nation must also be a shareholder). “[Regionally], Lebanon is our newest country of operation, and our largest country by business volume is right now Egypt,” Biery says. “This is a new region for us, and we see much opportunity in Egypt. Lebanon is [a] smaller economy, but we see many opportunities here.”
However, even with qualified lending support available from a growing number of IFIs, banks Audi and Byblos both confirm that they have been recently on consolidation mode due to the economic situation and their growing cost of funds.
“In 2018 we started to decrease [exposure], and in 2019 we are really in the mode of trying to consolidate, of keeping our portfolio and our customers in the pink,” Sabbah says. According to Beyrouti, tightening of credit is visible all around the banking sector. “Most of the banks are in the modes of taking care and improving or consolidating their portfolio. We [at Byblos] have not stopped lending, although we have the liquidity, but we have tightened our lending policy. Our policy continues to be conservative, so this is nothing new,” she says. “Today being conservative means that we are a bit tighter on our credit standards. It would be very surprising for a bank to tell you otherwise after five years of limited growth [in the country’s economy] and rising interest rates.”
Diverse strategy plays
However, this reality is not the whole picture. In the strategy of Group Credit Libanais, emphasis on the development of SME lending was placed to the point that the three-year plan for 2019-2021 is to expand this specific activity. “We actually set a target to increase it from 20 percent of the bank’s total consolidated lending at the end of 2018,” Rizkallah tells Executive. “Under the bank’s three-year strategy, the objective is for SME lending to reach 25 percent of the total consolidated lending portfolio by year-end 2021.”
Elie Alouf, general manager at medium-size BSL Bank, also confirms that his bank’s strategy is to continue increasing its SME lending. He tells Executive that BSL has recently introduced a simplified loan application for SMEs, different to that required from corporate loan seekers. In the total lending portfolio of BSL today, 35 percent of total lending is to SMEs, 44 percent in retail, and the balance is in their corporate lending portfolio. “I do not want to decrease [lending] to large corporations, but from now on, all the loan growth in our portfolio will stem from lending to SMEs and retail clients,” he says. “Our target is to reduce the concentration [of loans] for risk-management purposes.”
He goes on to say that his approach is one of a self-chosen mandate to pursue the SME market because “it is the major driver of economic growth anywhere in the world,” even as he experienced some additional barrier in not having alpha bank size when he approached a first IFI on behalf of BSL.
“I approached one IFI that told me they only deal with alpha banks. However, they did not close the door as they said they will look into BSL. This makes me optimistic because for the last three years we have shown real nice profitability and credit risk performance,” he says. “Our asset quality is one of the best, if not the best in Lebanon, and we have an appetite for lending. We will find a way, knowing that at the end of the day it is a disadvantage [not to have an IFI facility] because IFIs are lending at very low rates, so as for their partner banks to be able to lend at low rates.” Alouf concurs that IFI preference for dealing with well-governed alpha banks is understandable, but calls for IFIs for reasons of fairness and avoidance of distorting impacts on the Lebanese banking sector to also consider beta banks that are solid, well-governed, and stable.
Alouf’s ambition looks like not a bad match to what IFIs such as EBRD aim to achieve in Lebanon. Asked about the strategy and projects that EBRD pursues locally for the rest of 2019 and beyond, the IFI’s country head Biery emphasizes that she hopes to find opportunities across all sectors and ranging from investments in government projects and infrastructure projects in line with priorities stated at CEDRE to public-private partnerships (PPP) and private sector plays. She explains, “2018 was our first year of making investments in Lebanon in earnest, and our focus was largely on financial institutions. This is what we do in any country because local banks are critical for facilitating greater outreach to invest in real economy as much as possible. It is also an entry point for us to get to know a country. We know that the financial sector in Lebanon is particularly important and constitutes a large part of the economy, so they will always be a big partner for us here.”
In terms of numbers, a first corporate loan and deals with banks advanced the EBRD’s local exposure to 244 million euros. “In 2018, we invested in a green economy financing facility and in the first green bond in Lebanon, took an equity stake in a bank, and did an SME credit line. We also did several trade facilitation lines and beyond this we did our first corporate deal to a private electricity distribution services provider,” Biery says. “In the background of all this, we did an enormous amount of work to understand what the other financing needs are in Lebanon; we made a wide outreach to companies in all sectors, and a wide outreach to the government to understand what the sovereign financing needs and public-private partnership possibilities are.”
Aligning divergent priorities
Economists at IFIs and local bankers are unanimous in declaring that the spiking costs of funds for Lebanese banks make the presence of capacious IFIs today even more beneficial for the Lebanese economy than was the case in previous years with less pressures. This is true even as the banks emphasize the eminent role of careful risk assessments, regardless of any IFI funding deals that they have.
“Byblos has always kept its eyes out for industry, manufacturing, trade, and contracting. We always have wanted to finance these sectors because they, for us, are the productive sectors that promote the economy and create jobs,” Beyrouti says. “Therefore it is part of our rationale [to support these sectors and their job creation]. However, as a commercial bank, we have to study the risk for each client on a case-by-case basis.”
Noting that Byblos signed five global loans with IFI EIB over the past 15 years, and the most recent of them for 200 million euros in last December, she emphasizes, “One has to understand that the market is difficult, and that the cost of financing has lately increased tremendously, so we have to look at both the cost of funds and the matching of maturities. Since the costs of funds have increased for the commercial banks, the IFI funding lines play a greater role. Banks have to make it viable for the SMEs to get loans. We need to be able to provide financing at acceptable rates in order for the economy to keep going. Lending with IFI support provides added value to our SME clients, whether for their working capital, or in long-term financing contracts.”
Lastly, it should not be overlooked that SME finance and the extension of valuable business support to SMEs also is a matter for financial institutions outside of banking. Just one example for this entwining of the fortunes of SMEs with the broader financial sector, and for their underserved needs beyond access to loans, is credit insurance. In the experience of Karim Nasrallah, general manager of the Lebanese Credit Insurer (LCI), SMEs are a tough sell for credit insurance, although SMEs would be the companies that are in the biggest need of the cover.
“SMEs constitute the bulk of businesses, and there is a huge population of companies that LCI has not yet catered to. While our normal business in the Lebanese market caters to medium and large companies, there is a possibility in creating a standardized product that would address the difficulties SMEs have in subscribing to a credit insurance policy,” Nasrallah tells Executive. “This relates mainly to reporting—where credit insurance requires a lot of monthly reporting—and to having a product that one can acquire almost off the shelf, buying at the beginning of the year and renewing it at the end. We examined what could be implemented in Lebanon and worked on such a program, which we called Tajer, for trade.”
He elaborates that the program’s wider concept is to make SME companies ready for trade and provide them with safety of their receivables through a credit insurance policy that moreover, from a banking perspective, could be looked at as physical or moral security to provide funding against. By Nasrallah’s reasoning, Tajer could even been sold through bancassurance channels and be used in such a way so that working capital provided by banks to SMEs could be secured with these companies’ receivables, as enhanced by a credit insurance policy.
Better financial inclusion of SMEs, whether in the form of so-called green lending, preferential SME credit lines, trade finance facilities or credit insurance, holds great promise. Even with the caveat that the economic fruits of SME activity can be small, with less benefits in terms of average salaries than generated by large corporations, people in diverse societies can benefit greatly from more and economically better integrated SMEs. It is indeed hopeful in a country passing through hard financial times, like Lebanon, to know that, the more SME finance success stories such as Tony’s they have, the better their prospects at modest prosperity.