In Saudi Arabia, slowly but steadily, a fintech revolution is underway. The Arab Kingdom has locked its sight on an ambitious mission for a vibrant society and thriving economy, and digital SME business finance forms an integral part of it. The country has seen a 14.7x increase in fintech companies over 4 years, flying past its target of 60 fintech companies by 2030, to touch 147. In the past year itself, it saw 79% growth, with investments crossing USD 400 million.The driving force behind this momentum has been the regulatory push for innovation outlined by the Kingdom’s Fintech Strategy. In the past few years, financial regulators have introduced several policies and licence initiatives for payment service providers, digital banks, debt crowdfunding platforms, open banking providers and more. They have also set up independent bodies and various programs to facilitate entrepreneurial creativity.
Entrepreneurs, or small and medium enterprises (SMEs), and their contribution to the economy, sit at the heart of the Kingdom’s mission. Saudi Arabia counts more than 978,445 SMEs, which account for 99.5% of all businesses. However, a mere 6%, or only one in twenty SMEs, use commercial banks in the country. This is one of the fundamental gaps that the Kingdom’s fintech strategy aims to correct.
Saudi Arabia’s SME Vision for the Future
Saudi’s overarching transformation plan, Vision 2030, frames aspirations of economic progress through growth of SMEs and a better-developed financial services industry. The long-term program, which was introduced in 2016, consists of eleven Vision Realisation Programs (VRPs) that cover various dimensions of the plan. The National Transformation Program (NTP) and the Financial Services Development Plan (FSDP) are the two VRPs that address the development plan for financial services, private sector businesses, and business finance.
Exhibit 1 presents an overview of Vision 2030’s strategic development goals set as part of the NTP and FSDP programmes, and highlights the commitments mapped for the intermediate phase up to 2025. Focusing on SME-centric financial services, FSDP aims to increase the share of SME financing from banks to 20% by 2030 compared to 5.7% in 2019. Similarly, NTP aims to grow SME contribution to the GDP to 35% by 2030 compared to 22% in 2016.
The Changing Landscape of SME Business Finance
Open banking is poised to be a game changer for the Kingdom’s fintech startups and incumbent banks. The framework was introduced in November 2022 and is scheduled to go live in Q1 2023 with Account Information Service (AIS) as the first phase, followed by Payment Initiation Service (PIS). Technology providers like Lean and Tarabut Gateway, which have been licenced by SAMA as open banking API providers, are already working with large banks like Riyad Bank, Saudi British Bank, Banque Saudi Fransi, Alinma Bank and more to facilitate next-gen financial services for their clients.
SME Business Finance Use Cases Driven by Fintech Innovation
Business finance does not solely allude to “financing” in the literal sense but covers a wide range of core business financial services such as banking, payments, cash management, insurance, and administrative services such as accounting, bookkeeping, invoicing, expense management, payroll, and more.
Digitalisation has led to a step change in the way businesses operate. Over the past two decades owing to the fourth industrial revolution, business models have emerged that didn’t exist before. Therefore, banks have the opportunity to cater to not just the financing gaps, but also to the wider financial operating needs of businesses when approached in the right manner. We’ve previously spoken on this in The Need to Reboot Digital Banking for Small & Medium Businesses.
Banks’ Opportunity to Lead the Change in SME Business Finance
The low contribution of SME loans in Saudi Arabia has been a function of a strong governmental presence in the economy—oil being the key contributor to the economy—and due to the lower availability of bank funding owing to higher risk and transaction costs associated with SME lending. We see both these factors being mitigated by government support to drive Vision 2030, as well as growth in the number of SMEs in Saudi Arabia, which as per Morgan Stanley, was up 34% in 2022. The goal to grow SMEs’ GDP contribution from 20% in 2016 to 35% in 2030 is coupled with an aspirational target of improving SME loan penetration from 6% in 2016 to 20% of total loans by 2030.
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The lender may also take into account criteria including collateral, loan amount, term, and the applicant's creditworthiness, repayment capacity, and previous loans.
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SME or also known as Small and Medium-sized Enterprises are businesses that maintain revenues, assets, or a number of employees below a certain threshold.
These business entities are often regarded as the heartbeat of Malaysia’s emerging and developing economies.
Apart from providing vast numbers of employment opportunities, SME businesses are generally entrepreneurial in nature, helping to shape innovation.
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It is commonly perceived as AI might end up taking away jobs from the labor force, but the actual concept and purpose are to create jobs and responsibilities more efficiently.
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