Improving Credit Access in Jordan and SMEs

Credit access in Jordan
Credit access in Jordan has improved dramatically over the past two years thanks in part to changes in the regulation of funds by the government and the creation of newer, better lending programs across the country.

This year, global indicator, Doing Business has given Jordan’s overall credit access performance a ranking of 159 out of 189 countries, which shows an increase from a dismal 2016 ranking of 185 out of 189 countries. The continued improvement of these numbers will hopefully help Jordan to start pulling itself out of its nine-year stagnation of economic growth.

Background of Credit Access in Jordan

Lack of credit access in Jordan affects all citizens, but especially small and medium-sized enterprises (SMEs). In 2016, SMEs accounted for an estimated 98 percent of all Jordanian business and affected 40 percent of the country’s GDP.

A 2011 survey by the European Bank for Reconstruction and Development (EBRD) reported that 70 percent of SMEs considered themselves ‘credit constrained’ and thus had to put plans of growing and improving their business on hold.

Before the recent creation of new lending systems, SMEs found themselves having to choose between going to one of the many banks in Jordan for a loan and utilizing non-profit microfinance institutions (MFIs). Each of these methods proved to have significant flaws that made accessing credit impractical, if not impossible.

On the one hand, banks found it difficult to work with SMEs as most of them did not have enough collateral to mitigate the risk of providing the smaller business with a loan. On the other hand, while MFIs can provide loans to SMEs without the necessity of collateral, a system of regulation for MFIs did not yet exist within the Jordanian government.

Without regulation, interest rates varied wildly between MFIs, with some of them even going beyond the legal standard. As no clear method of recording credit existed, clients reported receiving the wrong amount of funds.

Remedying the Situation

Providing businesses with alternative forms of funding seems like the best method of helping them cross over the current financial gap. The Jordanian government, as a 2016 Oxford Business Group article reports, has already begun to put forward “initiatives with banks and multilateral institutions to offer more credit to smaller businesses”. The creation of the first credit bureau in Jordan, for example, will hopefully provide a more regulated method of credit access in Jordan than MFIs.

SMEs can also look into more private funding programs. The peer-to-peer lending program liwwa, for example, allows any SME with “business operations that are managed ethically” to apply for loans and, if accepted, campaign to receive loans from an individual or institutional investors. The program also helps regulate these funds by offering such services as negotiating overdue loan repayments with borrowers and investigating the businesses of borrowers to assure qualification. While the program has only processed 305 loans so far, this number can hopefully grow in the future.

The Jordan Loan Guarantee Corporation also provides SMEs with a more accessible finance option by acting as a facilitator between borrowers and investors. Created by a collaboration of USAID with the Overseas Private Investment Corporation (OPIC), this program supports businesses that “(1) have a well-defined marketing opportunity to start-up or expand, (2) need financing to achieve their goal; but (3) lack the collateral banks usually require for making loans” by offering a ‘loan guarantee’ to possible investors (mostly banks in this case). A loan guarantee means that in the case of a borrower defaulting on their loan, a business like JLGC will pay the investor back a large percentage of their investment. So far, the program has issued over 214 loans guaranteed and allowed SMEs to access over $50 million in finances.

Further success in these programs will provide SMEs with the opportunity to expand and thus create more job opportunities for those currently struggling to find employment. Along with this, if credit access in Jordan continues to improve, financially constrained entrepreneurial individuals will have more opportunity to create their business ventures.

Both of the aforementioned benefits can allow even those in poverty to change their social status and become consumers. This, along with expanding businesses, will hopefully improve Jordan’s rate of economic growth.

 – Lyz Frerking
Photo: Flickr