Small Business, Big Challenge

Developing-market SMEs, which have long competed for funding against bigger corporates, are counting on help from governments and multilateral lenders to keep afloat.

The long shadow cast by the coronavirus pandemic has extended perhaps most dramatically to small and midsize enterprises (SMEs), highlighting the outsized role they play in the economies of three developing regions—Southeast Asia, Africa and the Middle East—and the challenges they face going forward.

Full recovery from the Covid-19 crisis will be critical for these countries. According to a 2018 research paper by the Asian Development Bank (ADB), SMEs accounted for 96% of all businesses and provided two out of three private sector jobs in the Asia Pacific (APAC) region. And in that region, SMEs generated 42% of GDP in 2015. These companies are especially important players in APAC cross-border trade, accounting as of 2015 for over 40% of export values in China and India, 26% in Thailand, 19% in South Korea and 16% in Indonesia.

Across sub-Saharan Africa, SMEs are similarly dominant, accounting for about 90% of all businesses, according to estimates by the International Finance Corporation (IFC), a member of the World Bank Group, in a 2018 report. In Bahrain, the United Arab Emirates, Iran, Jordan, Egypt, Pakistan and Tunisia, SMEs account for more than 50% of employment, according to a 2020 working paper from the International Monetary Fund (IMF).

Despite their critical economic role, developing-market SMEs have long complained of inability to access funding on competitive terms compared with larger enterprises, which traditionally have much easier access to big-ticket bilateral bank funding, syndicated loan borrowing and the debt capital markets. In the Middle East and North Africa (MENA), according to Middle East Investment Initiative (MEII), nearly 63% of micro-, small and midsize enterprises (MSMEs) lack access to finance. Only 8% of lending goes to the SME sector, according to a 2018 World Bank/Union of Arab Banks survey of 130 regional banks, creating a credit gap that aggravates problems arising from a lack of financial infrastructure, weak legal and regulatory frameworks, poor accounting standards and scant data availability.

Cushioning the Blow

The Covid-19 crisis made these structural impediments starker. Thus far, loan assistance from local commercial banks and multilateral regional development banks, such as the ADB and the African Development Bank (AfDB), is helping to cushion the blow to SMEs inflicted by lockdowns and reduced economic activity.

What owners of these businesses as well as many economists really want, however, is for governments to take a holistic approach to pandemic recovery, initiating long-term structural changes including easier access to finance and capacity building, helping them to address such key challenges as digitalization, gender equality and closer adherence to environmental, social and governance standards on a more even playing field.

The impact from Covid-19 varied across the three regions: The most developed APAC economies, notably Singapore, have demonstrated resilience and adaptability while less developed economies such as Laos and Cambodia have struggled. In sub-Saharan Africa, where the pandemic has been less severe than in Asia, Europe and the US, South Africa’s SMEs have been the worst affected.

SMEs in APAC are nevertheless well positioned to adapt and thrive within the post-pandemic business environment, according to survey-backed research conducted by SAP in collaboration with Oxford Economics.

Since the virus hit, most have taken swift action to implement remote-working setups for employees and have invested in IT and collaboration solutions (69% of survey respondents) while also developing new products, services and delivery channels that address pandemic-period needs (46% and 66% of respondents, respectively). Technology investment has gathered pace even within the newly challenging pandemic environment as SMEs look to build—with an acute sense of urgency—operational efficiency via artificial intelligence (AI) and the Internet of Things.

“When Covid-19’s impact first hit, we rolled out a raft of liquidity-relief measures to help SMEs in our key markets stay afloat,” says Joyce Tee, group head of SME banking at DBS in Singapore, “providing these customers with a digital end-to-end journey from onboarding to fulfillment, ensuring they could receive support speedily despite pandemic restrictions.”

The challenge has been greater for SMEs in less developed economies such as Cambodia and Laos, where lockdowns and the collapse of tourism due to international travel restrictions have devastated revenue. In Laos, where SMEs account for 82% of total employment, the World Bank approved $40 million of emergency-finance working capital loans last October for local financial institutions to on-lend to SMEs. In Cambodia, SME Bank (a new institution, launched last April) and Agricultural and Rural Development Bank, both state-owned, disbursed $63.4 million of loans to SMEs in July to help mitigate the blow to their revenue from the pandemic. The funds were channeled partially through microfinance institutions; beneficiary sectors included food production and processing, consumer goods, tourism, industrial components and IT services.

Collaborating Support

According to a Rand Europe survey in July, some 85% of SME respondents within MENA countries doubted their company would survive more than a year. But over a quarter saw the pandemic as an opportunity to expand their business. Governments have made an effort to support the sector. Qatar and Saudi Arabia launched support packages for SMEs to the tune of $23 billion and $13 billion, respectively, while Tunisia set up a $103 million support fund. The Palestinian Authority approved $300 million for soft loans to the sector, and Lebanon earmarked part of a $797 million stimulus package for SMEs, according to a November OECD report. Other countries in the region took steps such as easing terms on loans.

Within sub-Saharan Africa, the key to keeping SMEs viable and operational has been collaboration between regional governments and their respective central banks to take the strain out of liquidity conditions via debt forbearance programs and repayment moratoriums.

“Many governments in sub-Saharan Africa had already started supporting SMEs before the Covid-19 pandemic, by setting up a clear strategy in specific sectors of the local economy such as agriculture, green energy, health or education,” says Patrick Egounlety, group head, Value Chain and Liquidity Products at Ecobank, a pan-African bank headquartered in Lomé, Togo. He cites Ghana, Nigeria, Côte d’Ivoire, Senegal, Burkina Faso, Benin, Kenya and Rwanda as standout examples of government support for SMEs.

Another key support in the early months of the pandemic was the IFC, which announced in July that private-sector businesses across the Middle East and sub-Saharan Africa would receive $5.6 billion during the current fiscal year, with an additional $2 billion for SMEs. During the 12 months through last June, the IFC had committed $4.6 billion to the region.

In South Africa prior to the pandemic, SMEs were already confronting headwinds from a moribund economy and collapsing demand in retail, transport, services (law and accounting), tourism and hospitality. Lockdowns across the country only exacerbated conditions.

“The pandemic has reinforced our stance that, as a bank, we need to assist our SME clients beyond just lending,” says Simone Cooper, head of transaction and liability products for the rest of Africa at Standard Bank Group in Johannesburg. “We helped many businesses with their pivot strategies by enabling them with innovative digital solutions.”

For the first time in its history, the AfDB last year provided budgetary support for the South African government, in the form of a 5 billion South African rand ($329 million) loan for its Covid-19 Response Support Programme, which includes support to SMEs. The AfDB also provided support to SMEs in Malawi, Madagascar, Mozambique, São Tomé & Príncipe and Angola through its Multi-Country Covid-19 Response Support Programme.

While these efforts have undoubtedly had an impact, expect demand to stay high for some time, given the persistence of the health crisis and the threat to SMEs. “I am convinced that government interventions to support SMEs will remain and will continue to grow, in countries where such a strategy has been put in place,” says Ecobank’s Egounlety.