In the wake of the financial crisis, bank lending globally declined. SMEs, smaller and perceived as higher risk, suffered the most from the resultant reduced funding options. MENA was no exception and indeed, with such a large population of SMEs, businesses were affected to a greater extent.
However, the widespread retrenchment by banks globally left a gap in lending that was quickly filled by innovative fintech “disruptors”, offering alternative finance. Coinciding with increased digitalization, fintechs emerged as an obvious, quick and easy answer to the lending gap.
With banks initially struggling to match fintech’s capabilities and efficiency, it appeared as though the growth in fintech could spell the end of traditional financial institutions. However, as most are mainly technology experts as opposed to business experts, new disruptors cannot match the same capital, client base, reputation for reliability, and global regulatory thresholds as banks.
As a result, collaboration between incumbent banks and new tech players is increasing, with banks now embracing the same digitalization that disrupted their industry. Moreover, more reputable technology providers in the financing industry have seen the importance of plugging such fintechs into their platforms, enabling banks to offer innovative products and adapt faster to the digital needs of all businesses.
While SMEs make up around 96% of the region’s businesses, there has been a reticence by banks since the financial crisis to provide loans to smaller companies. According to the World Bank, in 2010 and in the wake of the crisis, SMEs accounted for only 8% of all bank lending in MENA.
Fintechs have started to fill the gap left by limited bank lending in MENA. Models such as crowdfunding, asset-based financing and peer-to-peer lending have started to gain ground by providing faster and simpler access to finance. In the years after the crash, this has been an important lifeline for the region’s small businesses and, in 2015, 75% of online alternative finance raised in the region was invested into SMEs.
So, SMEs have long been a major part of the region’s economy, but in recent years the sector has started to expand. This growth is owed to intense efforts by governments across the region to put SMEs at the forefront of their economies, as economic models shift away from a traditional reliance on hydrocarbons.
Indeed, throughout MENA, a vast number of initiatives are being launched to foster the SME sector. In its Vision 2030, for example, Saudi Arabia has set a target to increase the GDP contribution of SMEs from 20% to 35% while the U.A.E., in its Vision 2021, set a target to increase the non-oil GDP contribution of SMEs from 60% to 70%.
The proliferation of SMEs has understandably triggered an increased demand for finance, with new and disruptive fintechs or existing technology-providers taking up the mantle of banks in the region.
More recently, MENA’s banks began recognizing the growing demand for digitalization to streamline their services. As a result, they are finding themselves having to embrace new technologies in order to maintain influence and drive efficiency and are increasingly viewing fintech companies as enablers rather than competitors.
In order to compete with these changes, many traditional lenders are looking towards fintech as a way of making services less cumbersome, including onboarding financial technology capabilities, such as asset-based financing platforms. Banks are also recognizing fintech’s potential for innovation. One example of this is Emirates NBD’s API Sandbox, launched in 2018, which provides an environment where fintech companies can trial solutions that could be incorporated into the bank’s core functions. Fintech collaboration has also helped banks to digitalize their marketing, now using various online channels to ease accessibility to their services for all businesses, no matter their size.
It’s a trend we’re likely to see more of, as traditional lenders seek to remain competitive in a market that continues to see disruption by new entrants.
A greater shift towards technological innovation is already reshaping the banking industry and the ways in which lenders interact with clients, particularly the region’s fast-growing SMEs. As mobile tech capabilities change, and new and innovative entrants come on the market, it’s a shift increasingly demanded of banks by their customers. Indeed, the region’s SMEs also need this now more than ever, as they move to the forefront of the region’s economies. If MENA’s banks and independent financiers can take the lead in adopting a collaborative approach between the innovation of fintech and the wealth and influence of traditional banks, it could be the catalyst for an even greater entrepreneurial revolution in the region.