Jordan Times
Thursday, October 4, 2001

The role of small and medium enterprises in the economy

By Nabil Y. Barakat

Nonetheless, in order for Jordan to reach its full potential for economic and social development, everyone must focus their attention on the country's small and medium enterprises (SMEs). All over the world, there is growing evidence that SMEs play an important role in the national economic development of any country. SMEs provide the majority of new jobs and produce much of the creativity and innovation that fuels economic progress.

The extra growth over the past several years throughout the industrialised countries has been due in large to the growth of SMEs. In the United States, as per statistics published by the Small Business Administration, SMEs represent 99 per cent of all employers and 52 per cent of the private work force. They provide virtually all the net new jobs and provide 51 per cent of private sector output and 96 per cent of all export of goods. These figures are similar in many other industrialised and developing countries around the world.

The achievements by Taiwan are a good example of the role of SMEs play in a nation's economy with limited natural resources. Over the last decade, Taiwan has established itself as a world-class supplier for a wide range of electronic hardware products. SMEs in Taiwan have been at the heart of this impressive success. In 1993, SMEs accounted for 96 per cent of the total number of companies, 69 per cent of total employment and 55 per cent of Taiwan's manufacturing exports. Most of Taiwan's current 400 electronic companies started as small businesses.

Throughout the world, one finds the SMEs to be the employee, the customer and the supplier who provide goods and services to the local market. They also provide the majority of entrepreneurship in any economy. Jordanians are as entrepreneurial as any other people of the world, and as in other parts of the world, they require government support.

Although statistics to measure the broad impact of Jordan's SMEs on the economy are not available, a key element in any economic development strategy is to focus on local strength and start expanding core competencies. There is much value in examining ways to create economic prosperity through the expansion of existing SMEs. They could very well be or become the backbone of the Jordanian economy.

With a supportive environment and a fully committed programme, Jordan's SMEs can grow and make their mark on this economy. The government in its efforts to support SMEs would address obstacles that prevent SMEs from contributing to the overall economic growth. The stimulant programme should provide high quality business support including training to develop and improve the managerial skills of prospective and current SMEs, assist SMEs in selling their products and services to the government and to assist SMEs to fully participate in, and benefit from, information technology, especially E- commerce. The programme should facilitate access to information, counselling and business development assistance and, most importantly, increasing SMEs access to capital and credit.

The most important aspect of the proposed stimulant programme, namely access to capital and credit for small businesses. SMEs are unable to obtain financing from private sources at reasonable terms, which is one of the most urgent needs for small business. Inadequate access to capital and credit is one of the most serious impediments to the success of small business.

SMEs usually have to pay a higher interest rate on short -term loans, if and when they are able to obtain such loans. Lending to SMEs is generally riskier and more costly than lending to a large business because of the high degree of uncertainty faced by them as evidenced by the high failure rate and the lack of collateral. Moreover, it is difficult for banks to determine the credit worthiness of SMEs due to lack of general standards, reliable market information and credit history of SMEs loan applicant. The administrative costs of lending to SMEs are very high and the size of the loans is too small to cover the costs.

In industrialised countries and in many developing countries, governments consider financial support as the major component of a stimulant programme for the development of SMEs. Therefore, the government should look into establishing a governmental agency to function as a credit guarantee system for small and medium businesses. The agency would be of an industrialised country such as of the Small Business Service in the UK or the Small Business Administration (SBA) in the US.

The US SBA's mission “...is to maintain and strengthen the national economy by aiding, assisting and protecting the interest of small business to contribute to the economy.”

The proposed Jordanian government agency for credit-guarantee system for small and medium businesses (SMBCG) will provide SMEs with financial assistance through its participating lenders (private banks) in the form of loan guarantees, not direct loans. The bank loans will be subject to criteria to be set up by the SMBCG. Loans should be available to qualified SMEs to be used for most business purposes, including, purchase of equipment, machinery and inventory or to provide working capital.

In order for the programme to achieve its objectives of stimulating the growth and development of SMEs in Jordan, the guaranteed loans' interest rate should be below market rate, not to exceed 4 per cent. The SMBCG is to subsidise the difference between the market rate and the incentive 4 per cent rate. A pilot programme can be implemented with an allocated budget in the amount of JD20 million in order to evaluate the effectiveness and workability of the program. Policy in support of the long-term development of SMEs should be integrated into the country's overall economic growth.

The writer is the chairman of the Jordan Gulf Bank. This article was written in his personal capacity.

Back to October 4, 2001