Exploring new ways to address the finance gap in Saudi Arabia’s SME sector

It’s no secret that access to finance for small and medium enterprises is vital for their growth and innovation.

In the Middle East and North Africa region, SMEs account for 97 percent of businesses and employ half of the overall labor force. Therefore, a thriving SME sector can fuel growth and innovation for an entire region.

Saudi Arabia’s objective here is perfectly clear: Transforming the SME sector into an engine for economic growth — aiming to increase its contribution to GDP to 35 percent by the end of this decade.

Earlier this year, Monsha’at announced an 884 percent year-on-year increase in SME borrowing on Funding Gate, also known as Tamweel, the online financing platform.

Funding Gate has assisted over 2,770 enterprises while automating the SME lending process from inquiry through to delivery, thus reducing the average service delivery time from 86 days in December 2020 to 7 days in December 2021.

Despite these high numbers, there remains an estimated $123 billion finance gap in the Arab world. While lending is increasing —  Saudi Arabia having the second highest startup funding in the MENA —  many SMEs still struggle to access lending at the point of need. The rising adoption of Banking as a Service in the region is helping to address this finance gap while simplifying the lending process for SMEs.

The future of SME lending platforms

A recent market study conducted by Finastra on BaaS estimated an overall market opportunity of $7 trillion by 2030. What is even more interesting is that SME lending, corporate lending, and corporate treasury/FX services are poised to gain the highest traction. Therefore simplifying SMEs lending through BaaS is expected to drive that growth of 30 percent by 2024.

Currently the banking network lacks the needed datasets enabling them to efficiently price loans with repayment flexibility, rendering the SMEs market underserved.

According to Finastra’s market insight, more than half of SMEs worldwide use personal funds to finance their operations, while most of them would resort to using their own funds or reduce employees' salaries in response to an unplanned revenue loss.

Changing SMEs lending landscape 

A new generation “Lending as a Service” solution has the potential to change the SMEs lending landscape by addressing a significantly larger portion of that market.

By way of illustration, think of an SME that uses a standard ERP system —  a software used to manage daily business activities. When the company determines the need for additional financing, the SME owner or employee could place the request within the ERP system with one simple click. The software would then request permission to share data, such as revenues or any required documents. Upon approval and through an ecosystem, that request would be sent to multiple financial institutions, which would then propose financing offers – with the advantage of having access to crucial business data. The whole financing process would be completed in minutes instead of days.

SMEs represent an important customer segment critical to Saudi Arabia’s economic growth and competitiveness. With BaaS adoption growing in the Kingdom, it will help to address the trade finance gap and provide significant benefits to an often overlooked sector.

BaaS is bringing that new financing frontier which thousands of the Kingdom’s SMEs are thriving for.

• Nour Sabri, Lead Client Partner - BaaS at Finastra.