Enhancing access to finance for Micro, Small and Medium Enterprises (MSMEs) is high on policy makers’ agenda around the world, due to their role in the overall development and inclusive growth of nations. MSMEs are an important sector in the MENA region and have contributed immensely to the region’s socio-economic development. As the largest employer in the region, MSMEs play a significant role in reducing unemployment rates and stimulating economic development and innovation. However, their viability and growth can be restricted by lack of access to credit and equity, which results in a less vibrant private sector (Ayadi et al., 2021). In particular, MSMEs in emerging economies identify access to finance as a key barrier to their growth. According to the SME Finance Forum, the MENA region has the highest proportion of MSME finance gap compared to potential demand, measured at 85%. Access to credit for MSMEs is limited by a number of factors, including information asymmetries, as these enterprises are more opaque than large firms, and lack of collateral (Ayadi & Shaban, 2021; Barajas et al., 2020).

One of the key tools used by regulators and policy makers to enhance MSMEs’ access to finance is guarantee schemes. These schemes act as mechanisms of risk transfer, under which a guarantor (the guarantee scheme) ensures the lender (financial institutions; mainly banks) against a proportion of the possible losses incurred when extending a loan. This helps banks overcome collateral and information asymmetry constraints. The role of Credit Guarantee Schemes (CGSs) became clear during the COVID-19 crisis, as governments in the region provided financial support to credit guarantee schemes, to channel them to sectors in need (Ayadi & Sha’ban, 2021).
Hence, the development of CGSs in the region can have a clear impact on MSME access to finance. In recent years, CGSs witnessed significant growth, not only in terms of volume but also in product innovations, operations and digitalisation.

This policy paper provides an analysis of the role of CGSs in promoting access to finance for MSMEs and the impact of digital strategies. First, this paper provides an overview of MSME financial inclusion in the region and the challenges faced by these firms in accessing formal banking services. Second, it reviews the design and performance of guarantee schemes operating in Egypt, Tunisia, Lebanon, Jordan, Morocco and Algeria (EMGN members from the Southern Mediterranean). The analysis is based on a comprehensive literature review, desk research, a survey and meetings conducted with guarantee schemes operating in these countries. The paper clarifies the role of guarantee schemes in enhancing access to finance for MSMEs and how digital solutions have the potential to enhance their outreach. Finally, it provides policy recommendations on how to strengthen their role.

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This policy paper emphasises the role of digital financial inclusion as a pillar of resilience to respond to exogenous shocks and pandemics, such as the COVID-19 crisis, and recommends prompt actions to reach the unbanked via digital financial services, in order to help these vulnerable groups throughout the current challenging conditions and recovery period.

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In view of EMNES research, our findings provide justification for the following policy recommendations:

• • • Achieve macro and financial stability by
      • ensuring sustainable government finances;
      • ensuring monetary stability by targeting low inflation;
      • tackling the high level of non-performing bank loans.
    • Increase financial system diversity and enhance lending efficiency via
      • financial market development (private bonds issuance, private placements, equity anzd IPO markets, etc.);
      • developing legislative regimes for alternative financial structures and facilitating the adoption of new financial technologies (technology neutral approach, sandboxes, etc.).
    • Widen the access to affordable financial services for households and MSMEs by
      • developing credit registries and guarantee schemes for MSMEs;
      • developing and promoting digital financial services and increasing the role of postal offices for provision of basic financial services for households;
      • requiring banks and insurers to provide basic financial services for households;
      • investing in enhanced financial literacy for the low skilled.

The EU can contribute to this policy agenda for inclusive and job-driven financial development through funding, assistance and expertise in SEMCs:

• • • It can fund the development of a guarantee fund to cover losses of defaulted loans and promotion of financial inclusion initiatives;
    • It can assist in the development of an action plan for financial market integration;
    • It can provide expertise to develop alternative EU financial instruments within the EU for SEMCs.

The objective of this policy paper is to review the most salient trends in financial development, to identify the main challenges and to provide policy recommendations to achieve financial development that is inclusive and that contributes to economic growth and job creation in SEMCs.

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