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A country steeped in rich history of ancient civilisations and breathtaking natural landscapes, Iraq’s beauty contrasts starkly with the challenges it faces today. Iraq has endured years of conflict and political instability which has severely impacted economic activity, no less for its crucial SME sector.
Access to finance remains a significant hurdle for Small and Medium Enterprises (SMEs) in Iraq. Despite being the backbone of the economy, contributing significantly to employment rates and GDP, SMEs face substantial barriers to obtaining the financial resources they need to grow and sustain their operations.
According to a report by GIZ, it is estimated that the financing needs of the Iraqi SME sector is between 3.8 and 8.4 billion USD. Despite this substantial need for finance, less than 5% of SMEs actually have access to credit.
But what is causing such a significant gap between demand and supply?
A significant challenge is the risk-averse nature of Iraqi banks. Given the unstable economic environment, banks are hesitant to lend to SMEs, which they perceive as high-risk borrowers. This risk perception is further compounded by the substantial collateral that many banks often require, which many SMEs, in many cases, cannot provide. Even when collateral is available, its valuation and acceptance by banks can be inconsistent, adding another layer of difficulty for SMEs seeking financing.
There are a wide range of risks associated with SME finance in Iraq, most notably political instability and security concerns which lead to sudden economic downturns and disruptions to daily business operations. Macroeconomics also come into play, with fluctuations in oil price and currency stability posing risks to both borrowers and lenders alike.
The risk-appetite of banks is also not helped by underdeveloped regulatory frameworks. With weak contract enforcement and the slow judicial process, it is difficult for banks to recover loans in case of default. Moreover, the lack of a functioning bankruptcy law means that there is no clear process for restructuring or liquidating failing businesses, which increases the perceived risk of lending to SMEs.
Yes, these risks are significant, but learning to manage and mitigate them is far from impossible, and it is the level of understanding of the SME sector specifics within Iraqi banks that decreases the risk appetite and leaves them unable to tailor products appropriately. Capacity building is essential for improving access to financial services, as it supports banks to effectively assess and manage the risks associated with SME lending. To address this knowledge gap, GIZ, in collaboration with Frankfurt School and the Central Bank of Iraq, is implementing the „Strengthening Public Finances and Financial Markets in Iraq“ project. As part of this initiative, Frankfurt School has developed two specialised training programmes focused on risk management and credit analysis, specifically tailored to the Iraqi SME context. These programmes employ Frankfurt School’s renowned didactical approach of teaching real, hands-on skills and knowledge through practitioner experience, case studies and group exercises, all of which have instant applications.
The specially designed risk management programme, seeking to support risk managers and senior bankers, focuses specifically on the drivers of default in SME credit, early warning signals, as well as developing collateral strategies and loan products that are both socially responsible and conducive to loss minimisation.
In the credit analysis programme, loan officers and relationship managers are supported in assessing client creditworthiness, understanding financial statements and key financial ratios, as well as effectively analysing an enterprise’s financial situation.
Improving access to finance for SMEs in Iraq is crucial for the country’s economic development. While the challenges are significant, they are not insurmountable, and the potential is absolutely there. By addressing the risks associated with SME financing through capacity building and technical assistance, Iraq can create a more conducive environment for SME growth. There is also a major role for regulatory reforms to play, for example through the establishment of clear lending policies and governance structures.
Ultimately, supporting SMEs in accessing finance will lead to increased economic resilience, job creation, and sustainable development in Iraq.
[1] https://www.giz.de/de/downloads/giz2023-en-priority-financing-needs-of-iraqi-smes.pdf
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