SMEs in Jordan have long been held back by a lack of access to finance. The Jordan Loan Guarantee Corporation is working to change this.
By: Dina Al-Wakeel
A public shareholding company that was created in 1994, the Jordan Loan Guarantee Corporation (JLGC) was a Central Bank of Jordan Initiative to improve access to finance for the Kingdom’s SMEs.
The JLGC provided guarantees for more than 1,800 loans during 2017, with a total value of JD99 million, compared to about 1,300 loans in 2016. The number is set to increase by the end of this year as during the first six months, it provided guarantees for 933, with forecasts the total number could reach 1,900 or more.
Here, Mohammad Al-Jafari, the JLGC’s director general, discusses the two new funds created by the Central Bank of Jordan (CBJ) that target SMEs and startups while calling on banks to look at these opportunities through a different lens.
Last year the Central Bank of Jordan announced the establishment of two funds to support SMEs and startups. How important are these new funds?
In 2016 there was a discussion between the Central Bank and the government about the need to further assess the different types of financing needs for SMEs. Based on the thorough evaluation of those needs, the CBJ took two important initiatives that are directed towards startups and innovative startups and SMEs.
For the startups it’s about the number of years in business. Many of them are bankable and there is a chance for them to obtain debt financing from the banking system. So the CBJ decided to create a special fund at JLGC that is directly channeled to banks debt financing to small startups in particular. The fund was established within the same guidelines as the loan guarantees, the only difference is that as a condition the company should be less than three years old. The guarantee goes from the standard 70 percent to 85 percent and at a heavily subsidized rate. So instead of charging them 125 to 150 basis points, this particular guarantee is provided at 1 percent to encourage banks to lend to startups. The problem that the startups mainly have is they don’t have financial history and most of them don’t have the needed collaterals. So banks consider them as very risky.
The other initiative—the Innovative Startups and SMEs Fund (ISSF)—targets innovative startups, which like conventional startups they also lack the financial history and the collaterals, and more importantly their business is very risky and their success rates are lower. So they are considered non-bankable. The Central Bank decided these startups needed different financing arrangements other than the debt financing, so we sought direct financing and equity investments.
The idea came after research and analysis of the existing ecosystem in the country showed there was a financing need for the innovative startups here. In the project appraisal document that was conducted by experts from the World Bank under the supervision and guidance of the CBJ it was highlighted that the country is in real need for something that really makes a difference in the ecosystem in general, not only to provide the needed financing but also to create the market and improve the ecosystem. So the project was designed so that it doesn’t make a conventional venture capital fund, but to be something at a bigger scale. The fund will be doing direct and indirect investments through the existing venture capitals or those to be created later on.
Are both funds operational already?
The startups loan guarantee fund started operations in early 2017. It’s doing great and so far more than 180 loans have been subsidized. But the ISS will be launched in September 2018 and the total funding will be $98 million, 50 million were provided by the World Bank Group as a loan to the Jordanian government. The other $48 million were provided by the CBJ. It was established in the form of a private shareholding company with two shareholders, the CBJ and JLGC, which will also play the role of the implementing agency. The JLGC acts on behalf of the Jordanian government. The funds will go to direct investments as one component and the other equally important component is the financing to enhance the deal flow creation in the system.
How do you decide which projects are worth funding and which don’t?
At the ISSF, we will have a board of directors chaired by JLGC and the board will include six private sector representative experts. But we will also have an investment committee under the board of directors. Their responsibility will be to decide. They will conduct the needed due diligence, analysis and evaluations and will decide if they will or will not invest in the project and how much will be invested.
That’s flexible; it depends on the financing needs and the due diligence conducted. It is a matter of risk return trade off, this is how much we are willing to risk in this particular project.
Will it only be financial investment or will it include technical advice as well?
The ISSF could do the direct or the indirect investment but it will not provide direct training and capacity building. It will support the provision of such services through other partners in the system. So the ISSF will have different partnerships with other stakeholders, including those who provide mentoring, support, business incubators, accelerators and universities, because the bottom line is that we want to improve the whole ecosystem including institutions and even regulations. We will be working with all stakeholders to ensure the successful implementation of the mission.
Since your establishment, how has the banks appetite to invest in SMEs developed?
It’s hard to generalize but many of the banks are really interested in SMEs. At this stage we have about 12 banks out of the 25 operating in the country that have already established an SME unit. So the mind is shifting because after the global financial crisis and the Arab Spring everyone is aware of the economic challenges that the country and even the region is facing. We noticed there is clear stagnation in the corporate market, the economic situation is really challenging which limits banks’ ability to grow through corporate lending. The market is somehow tough at the corporate level, and at the retail level and the conventional consumer lending products the market is somehow saturated. So many of the banks in the country have realized that the only way to really continue achieving continuous growth is to move towards the SME market. And they have also realized that SME banking is profitable. It is very promising as well because when you start with a small business, this small business is scalable, it will become medium then large. Additionally, when businesses are comfortable with the bank they’re dealing with, they continue doing business with the same bank. Thus, banks with long-term perspective realize how important it is to start the journey with small businesses and to really help them grow gradually, with our guarantee component.
Do you also cooperate with the other international organizations lending to banks to lend to SMEs in the Kingdom?
All the facilities that were provided came through the CBJ and here I mention the World Bank, the EBRD and the Arab Fund for Economic and Social Development. Over and above the CBJ has its own funding facility under which it enables each bank to lend to productive sectors in the country and the list is being expanded with the addition of IT, engineering facilities, the agricultural sector and services, besides the conventional manufacturing industries.
Many of the banks are very close to fully utilize this facility as well. The funds are provided at heavily subsidized rates; 1 percent for businesses outside Amman and 1.75 percent for businesses inside Amman. We will keep telling banks to increase their risk appetite. The capacity is there, the funding is there, and the heavily-subsidized rate augmented by the loan guarantee component is also there. In the end it depends on the strategic direction of the banks, many of them are in the process of paying more attention to SMEs. Others are not interested in that type of business.
So the supply side is ready, but do you think the demand side is ready as well?
Definitely. The CBJ being the regulator for the banking system keeps encouraging banks to do more for SMEs. But the banks from their perspective are willing do that as long as there are bankable cases provided by the business owners. I think we need to pay more attention to the demand side to really improve the capacity and the level of financial sophistication of the SMEs so they are able to analyze and understand what financing means, why financing is important, what is the appropriate type of financing for this particular stage, to know how to package and present their case and how to speak to the fund providers. We need to have some balance between what has been accomplished on the supply side and what has been done and needs to be done on the demand side to make sure that we reach the targeted level of financing for SMEs.
How do you think the controversial former version of the Income Tax Law dealt with SMEs and how should the new law look like when it comes to taxing this segment?
In general I believe that the share of income tax of the GDP is still very limited. Seventy percent of the taxes in Jordan is indirect and this is not fair. Progressive income tax is the right fair taxing system. The Income Tax Law needs to be revised but we need to understand the implications of this revision. It is not about how much we are going to bring to the budget, it is about the long-term economic implications.
Four out of five business and employment opportunities are created by SMEs so a special attention in the coming law should be given to them; special provisions that would give some income tax relief or waver for the SMEs in particular, and a special attention to the startups as well. Large corporations are well established and they have steady income so they can absorb that.
It is really premature to comment on how should the new version look like but I think we need to have a new law that looks at the economic implications before the financial returns on the government budget.
Do you think having a fair law would encourage investors and entrepreneurs to remain in Jordan?
The good thing about the new companies law is that it tackled the issue of venture capital funds and their creation. The good thing about the first version of the Income Tax Law is that it included a special clause that will enable the country to avoid double taxation when it comes to the VC funds. I hope it will continue to be there because it is very important, but we need to pay more attention to the ease of doing business environment in Jordan. Because what I heard from businesspeople, it’s all about the way we do business in Jordan and not about the level of taxation, so it is important to make it easier for people. The work on e-government also needs to be expedited because we’re late and we shouldn’t be hesitant to make the needed changes in the eco-system.
What are the main challenges that you face?
For JLGC, despite the change that has been achieved, banks still have to pay more attention to SMEs. They need to realize that doing business with SMEs is profitable. So there is a challenge pertaining to the banking system but we also have a problem with the SMEs themselves. As I have mentioned earlier, SMEs need to do their homework to enhance their chances of success. We haven’t met a challenge in increased default rate. It’s within the acceptable levels at less than 4 percent for our programs. We don’t have problems with collection, but most of the banks have a problem when collecting through courts, which takes a long time. What we have noticed is that financing for fixed assets has retreated relative to the financing of the working capital. So the number of newly established businesses seeking financing is slowing down which is a challenge. When we do working capital finance we feel that we help businesses to continue but we are happier when we do fixed asset finance because this is either a new business that is being established or a business expansion. In both cases it’s very flattering for us because new jobs will be created. So we’d love to see more of that.