Dubai: A large number of small and medium enterprises (SME) in the Middle East and North Africa (Mena) region are starved of funding because they have no access to both conventional and Islamic bank financing, according to International Finance Corporation (IFC), a member of the World Bank Group focused on the private sector.

According to a recent IFC study on Islamic banking opportunities across small and medium enterprises in Mena there is potential gap of up to $13.2 billion for Islamic SME financing across nine countries in the region.

“This is due to the fact that several un-served and underserved SMEs do not borrow from conventional banks, owing to religious reasons. This potential is a “new to bank” funding opportunity, which is still untapped, as banks and other financial institutions lack adequate strategic focus on this segment to offer Sharia-compliant products,” said Mouayed Makhlouf, Regional Director for IFC, Mena.

IFC commissioned the study as part of its initiative to reach out to SMEs demanding Islamic products and enhance investment and advisory services offerings to Islamic financial institutions.

The study, carried out in Iraq, Pakistan, Yemen, the Kingdom of Saudi Arabia, Egypt, Lebanon, Morocco, Tunisia and Jordan, shows that approximately 35 per cent of SMEs are excluded from the formal banking sector because of the lack of Islamic products, despite huge demand.

Of the 36 per cent of banks in the region with an SME offering, only 17 per cent currently have an Islamic SME offering.

The study also reveals significant variation across the countries in the number of SMEs looking for Sharia-compliant products — up to 90 per cent in Saudi Arabia but decreasing to 4 per cent in Lebanon.

A comprehensive survey of more than 160 banks (out of the total +270 banks) in Mena reveals that among banks offering Islamic products to SMEs, only 17 per cent have the operational capabilities to effectively serve the requirements of the Islamic SME banking sector.

Overall, 66 per cent of the market offers an SME proposition, out of which only 50 per cent offer an Islamic SME offering (31 per cent of the overall market), despite the fact that half the market offers Islamic banking services. This indicates that 19 per cent of these banks are yet to consider offering Islamic SME products, primarily due to not being aware of, or understanding, the demand driven by religious beliefs.

Despite 66 per cent of the banks offering SME proposition and 47 per cent having adequate SME product offerings, the overall SME portfolio penetration is only at 37 per cent. This indicates that either the banks’ strategies are not geared towards SMEs or they are reluctant to offer SME products due to the high risk.

A high level of risk aversion by banks, poor regulatory environments, differing perceptions of Islamic finance, and a lack of relevant products have been identified as lack of bank funding to SME sector in the region.