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The Portland Trust is committed to promoting peace and stability between Palestinians and Israelis through economic development.

FINANCING PALESTINIAN SMES

Introduction

This document was prepared by the Palestine Economic Policy Research Institute (MAS) at the request of The Portland Trust. It examines the needs and supply of Small and Medium-sized Enterprises (SMEs) for credit, and how they would be affected by a loan guarantee scheme which reduced the onerous collateral requirements currently restricting their growth. The analysis examines both the demand for, and expected supply of, credit over the short and medium term.

The demand analysis is based on the most in-depth and up-to-date information on Palestinian SMEs’ financing needs. During August 2005, MAS and the Palestinian Central Bureau of Statistics (PCBS) conducted an extensive survey consisting of structured interviews with 450 Palestinian SMEs from across the West Bank and Gaza Strip. The survey was specially commissioned for this report, which presents its results.

On the supply side, interviews were conducted with the major banks in the Palestinian Territories to examine historical credit decisions as well as future projections of the supply of credit. The authors used existing published and unpublished secondary data from the PCBS and the Palestinian Monetary Authority (PMA) to supplement and verify the survey data.

Executive Summary

· The financing needs of Palestinian SMEs over the short and medium term are substantial: SMEs estimate that their immediate financing needs amount to $647.2 million over the next year. $571m of the immediate financing needs would be in the form of individual credit extensions worth $10,000- $500,000.

· Based on current economic conditions, SMEs estimate their credit needs over the next five years to be $996m. 95% of the amount required would be in the form of loans over $10,000, amounting to $950m.

· If closures are eased and the political and economic prospects improve, demand could be substantially higher.

· Collateral requirements severely restrict demand. Postulating a loan guarantee scheme which covered even 60% of collateral requirements (and under current economic conditions), SMEs estimate demand for loans over 5 years to reach $909 million. This would cover over 90% of their estimated credit needs.

· Credit officers note that a third of loan applications are rejected for insufficient collateral. SMEs indicate that over 70% of all rejected applications are for this reason. Furthermore, 100% of SMEs who applied for credit and then withdrew cited prohibitive collateral requirements. Of those SMEs which succeeded in obtaining a loan, almost three quarters stated that it was not enough to cover more than 75% of their capital requirements.

· $335 million of credit was disbursed for private-sector economic activities in 2004. Even under a pessimistic scenario, where the credit/deposit ratio falls to Intifada-levels, the total credit supply 2005 – 2009 for economic activities is estimated to reach almost $2 billion. A positive projection, where the ratio reaches Jordan’s in 2003 (57%), sees this credit supply rise to over $3 billion in the next 5 years.

· Only 13% of SMEs have applied for credit since 2000, but 63% state they have plans for expansion in the next five years. 66% of SMEs state they are currently in need of financing. These figures could be even higher if economic circumstances continue to improve.

To download and read the full report, please click here