A Viable Solution For SMEs: Making The Case For Mini-Bonds In The MENA Region
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One of the main reasons behind the Arab Spring in 2011 was the dissatisfaction of the masses with the economic conditions. taking a closer look at the policies of the Arab countries before the Arab Spring, it is evident that many countries were following and pursuing economic growth strategies; however, in reality, those strategies failed to reach the lower quartile of the populations. With increasing unemployment rates and the tumble in oil prices post revolutions, the new administrations were left with a tougher job to stimulate their economies and pave the way for a future of hope. The magical word of SME then surfaced again, and it was proposed by many to offer a helping hand to rebound economic activity and help ease the increasing unemployment rates.
But it’s one thing to propose solutions, but it’s a whole other ballgame when it comes to execution. The SME sector has -not only regionally, but internationally as well- always suffered from disintermediation. Banks’ lending activities have always favored big-ticket transactions, leaving the SME sector always struggling for credit to grow its activities. Enterprises’ growth is always dependent on the amount of investment in growth assets (fixed assets that generate future revenues), and doing that requires medium to long term financing that is very scarce to find for SMEs. Traditional short-term financing is never a trouble to source for SMEs; however, longer term financing has always been a hindering factor that keeps medium-size enterprises from growing to become large ones, and small companies from growing to their next levels. Often times, SMEs remain hanging in their positioning without breaking through to the next level.
G20 meetings have stressed in 2014 the need to stimulate job creation and GDP growth, and this can never happen without a real game changer in the way lending activities are perceived for the SME sector. Apart from investments in the infra sector as a definite driver for economic growth, the SME sector comes in equally as a savior and more governments are realizing its importance. The SME sector is one of the top priorities for the European Bank for Reconstruction and Development (EBRD) to develop in the Southern and Eastern Mediterranean (SE-MED) region as it represents the backbone of the economy, and it is the source of much needed job opportunities. since 2012, EBRD has providing specific credit lines with a value of more than EUR380 million for SMEs in Egypt, Jordan, Morocco and Tunisia, in addition to donor-funded capacity building. International financial institutions (IFIs) including the EBRD are placing great attention not only on funding activities, but also on advisory and capacity building for SMEs. The role of IFIs cannot be more important in the current transition period, as many Arab countries are finding it difficult to kick-start economic activity and thus traditional and innovative solutions are very much needed.
The relatively new product “mini-bonds” has not yet been introduced in the MENA region, and thus shedding some light on the topic might create the noise needed for such a market to breakthrough in the region. According to Capita Registrars, the industry, which accounted for £90 million in 2012 worldwide, is expected to reach £8 billion by 2017. Yes, that is ca. 88 folds, and without a doubt, this can’t be taken lightly.
So what are mini-bonds? They are the mini version of corporate bonds, with a twist of lighter structures and infant regulation. The attractiveness of mini-bonds lay within the fact that these bonds offer the hungry individual investor higher rates than the conventional banking deposit rates. In addition, mini-bonds require much less regulatory requirements that have attracted not only small businesses, but larger ones as well. However, for that latter reason, mini-bonds unquestionably have a higher risk element, which explains the higher returns. Mini-bonds, unlike corporate listed bonds, are non-transferable, which leaves investors stuck for the whole term, while in the case of listed bonds, the transferable element caters, as well as an “ejector seat” option.
The MENA market can benefit out of this emerging asset class, to curb down its high unemployment rates, reorganize the funds’ flow between deficit and surplus units in the economies. Creating this new channel of funding can have with no doubt its shadow of mini-sukuk (Islamic version) that can further furnish those that prefer sharia complaint financial instruments.
Financial disruption is here to stay, and make no mistake, mini-bonds/sukuk are receiving much support in the west as a viable solution for SMEs, and so should be the case in the MENA region.