Economy

Significantly More Effective

SMEs

A 2014 UNDP report calculated that SMEs constitute between 93-95% of enterprises in the country—however, the country’s unwieldy taxation system and sluggish approach to economic reform has, until now, been […]

A 2014 UNDP report calculated that SMEs constitute between 93-95% of enterprises in the country—however, the country’s unwieldy taxation system and sluggish approach to economic reform has, until now, been a barrier to SMEs intending to expand.

Over the last few years there have been a host of challenges facing SMEs. Weak creditor protection, with recovery rates barely over 32%, and high collateral requirements stymied further development. The 2014 UNDP report criticized the persisting red tape surrounding business set-ups, and noted high levels of bureaucratic inefficiencies and costly regulatory and set-up processes. The report concluded that the current state of affairs often put SMEs at a disadvantage compared to larger competitors.

Until now, a one-size-fits-all taxation policy has failed to differentiate between SMEs and has failed to provide incentives for SME growth. However, the private sector has been making moves to enable SMEs. There has been a recent emergence of private sector led support, which was spearheaded by the Banque du Liban, and was followed by Kafalat and IDAL.

The financing gap had not gone unnoticed by international corporations. The International Finance Corporation (IFC), the private-investment arm of the World Bank Group, announced in October 2014 that it would loan $2 million to Al Majmoua, a Lebanese NGO (also known at the Lebanese Association for Development). The loan was launched to specifically target small business owners and female entrepreneurs. Analysts noted aspirations for the loan to contribute to economic growth in the more rural regions, such as the Bekaa Valley. James Gohary, manager of the IFC’s Middle East and North Africa division, told press at the time that he hoped the loans would improve access to finance for those at the bottom of the pyramid and help stimulate growth.

In an effort to encourage job creation, in December 2014 the government launched a roadmap that sought to strengthen opportunities for the establishment of competitive SMEs. The strategy was launched as an individual focused drive, prioritizing the individual as the most important source of capital, recognizing that developing human resources would promote social and economic development on a wider scale.

The roadmap introduced a number of programs and incentives to facilitate SMEs’ access to external financing, in addition to the establishment of business development centers. Economy Minister Alain Hakim highlighted that the program also sought to modernize legal provisions regulating the establishment and management of SMEs. Some legal reforms are pending ratification by parliament and others are still under study. The laws that the road map seeks to amend include trade, bankruptcy, and intellectual property laws

One particular sector that is in need of SME reform is agriculture. In 2014, agriculture was responsible for 6-7% of the annual GDP and it employs 15% of the population. However, enterprises in the sector have difficulty securing funds. The Central Bank of Lebanon has launched several incentive programs to specifically target this problem. One of which is providing environmentally conscious loans to SMEs that use drip irrigation, solar energy, or soil purification for example. According to this scheme a subsidized loan of up to $1 million may be provided with a 0% interest rate. These loans are provided by the National Energy Efficiency and Renewable Energy Action (NEEREA) financing organization, which was adopted by the Central Bank of Lebanon.

Another incentive program is the Circular 331, which encourages commercial banks to invest in startups. The Central Bank of Lebanon will guarantee up to 75% of the value of these commercial bank investments in the capital of startups that meet a determined criteria in terms of creating jobs and contributing to the economy.

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