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Improving Access to Finance in the Middle East and North Africa

March 23, 2010

March 2010 - Banking systems in Middle East and North Africa (MENA) countries tend to be large, measured by the ratios of bank deposits and credits to GDP. In several countries these ratios are higher than those that would be expected by their level of per capita income, size, and other characteristics. However, this financial depth does not necessary translate into financial access for firms and individuals. In most MENA countries there is scope for substantial improvements in microfinance, small and medium enterprises (SME) finance, as well as housing finance.

Some MENA countries tend to suffer both from lack of financial depth and lack of access, including the countries with state-dominated financial systems and the low income countries. In these cases policy-makers face an even more challenging financial development agenda.

Most financial systems in MENA are also undiversified, lacking non-banking financial institutions such as insurance companies, pension funds, mutual funds, and leasing companies, as well as private fixed income instruments. Equity markets seem large in several countries, but their contribution to access and efficiency is questionable, given the limited volume of funding provided, and the absence of domestic institutional investors contributing to efficient price discovery and liquidity.

Understanding better these mixed financial outcomes is an important challenge. Analytical work at the country level has identified some of the weaknesses that need to be addressed. It is clear that in many MENA countries financial infrastructure (credit bureaus and registries, collateral regimes), remains deficient, regulatory capacity in key areas remains undeveloped, and the predominance of the State in some countries hinders financial development. The Financial Sector Flagship Report that has been recently launched represents a major diagnostic effort that is expected to throw further light on the strengths and weaknesses of MENA’s financial systems. The flagship will benefit from joint work being conducted with regional partner institutions such as the Arab Monetary Fund, the Islamic Development Bank, and Union of Arab Banks, and regional associations of financial regulators. It will provide the analytical basis for an improved assistance strategy at the regional and country levels.

World Bank MENA Economic Development Department (MNSED) current financial sector program consists of analytical products, technical assistance, and lending projects. The main analytical product is the financial sector flagship, but MNSED’s program also includes the Country Financial Sector Assessments conducted jointly with the IMF, and country-level studies. Technical assistance includes projects to build the capacity of financial supervision agencies, as well as technical support to the development of instruments and markets. The lending portfolio includes policy loans supporting comprehensive financial reforms as well as investment loans providing finance to specific segments such as microfinance institutions, SMEs, and housing. For example, recent Financial Sector Development Policy Loans to Egypt and Morocco provide support to reforms that aim at improving access while preserving stability. Also a recent investment loan to Egypt provides finance to poor households and SMEs through participating microfinance institutions and banks.