Financial Crime World

Iraq’s Small Businesses Struggle with Access to Finance: Limited Credit Registry Coverage Hinders Growth

Background

Despite Iraq’s economic recovery, small and medium-sized enterprises (SMEs) in the country continue to face significant challenges in accessing financing, according to a recent report by the German Development Institute (GIZ).

Challenges Faced by SMEs

The report, which surveyed 257 SMEs across 10 governorates in Iraq, found that only 1.3% of the adult population has credit registry coverage, limiting access to finance for many businesses.

Key Findings

  • 55% of SMEs were established after 2017, but many close within five years due to the hostile economic and political environment.
  • Providing access to finance can help alleviate this issue, with credit guarantees potentially alleviating bank concerns about the creditworthiness of SMEs.
  • Limited collateral available to SMEs, with most equipment and machinery worth less than USD 15,000.
  • Only 16% of SMEs could provide suitable salary-based guarantees.

Financing Needs

SME owners rely heavily on personal and family resources to establish and run their businesses, with only 6% reporting that they have a bank loan. This reluctance is partly due to distrust about the liquidity of banks and excessive documentary and procedural requirements.

Demand for Loan Products

The survey found significant demand for short- to medium-term loan products for working capital and equipment purchase needs, but there is currently a lack of such products in the finance market in Iraq.

Banking Literacy

Banking literacy among SMEs was also found to be relatively low, with most unfamiliar with financing products other than traditional loans. Improved communication and training campaigns are needed to increase awareness and improve access to finance.

Potential Solutions

  • Appropriate SME loan products could focus on a loan size of less than USD 50,000, which is the range that limited existing SME bank finance focuses on.
  • Revolving credit products, which are not currently offered by most banks in Iraq, would be particularly suitable for enterprises that sell on credit to customers or purchase equipment and materials on credit.

Conclusion

The report highlights the need for a comprehensive approach to addressing the financing needs of Iraqi SMEs, including improved communication and training campaigns, as well as the development of appropriate loan products and credit guarantees. By addressing these challenges, it is possible to help Iraqi SMEs grow and thrive, contributing to the country’s economic recovery and development.