SMEs’ contribution to the U.S.A’s GDP is more than 50 percent. The insignificant contribution of SMEs to the Kingdom’s GDP may be due to the Oil and Governmental sector which represent the major impetus of economic activity. Dear Brothers and Sisters, SMEs are facing clear challenges in gaining the necessary funding for meeting their expansion needs due to various reasons including poor management, and lack of adequate guarantees and, subsequently, the difficulty of obtaining the necessary funding. In order to overcome this problem in the Kingdom, the Ministry of Finance, in collaboration with Saudi banks, established a guarantee program (Kafalah) for financing SMEs. The program, with a capital of Rls 200 million, is managed by Saudi Industrial Development Fund to cover a proportion of the risk of the financing entity in case of the failure of the guaranteed activity in repaying the finance or part thereof. The program also aims at encouraging banks to finance SMEs that have the constituents for success, but at the same time, they cannot present the necessary guarantees or accounting records to prove their eligibility for funding. The program has recorded good performance since its inception in 2006 until 1-Oct-2010, as the number of guarantees approved by the Ministry of Finance during that period reached 1,668 with a total value of Rls 644 million, while loans granted by banks under the umbrella of the program amounted to Rls 1.6 billion, benefiting about 1,113 SMEs.
Securitization markets developed where loans could be funded through the market by investors. In addition, money market mutual funds, securities lenders, institutional investors and businesses needed a safe way to deposit funds where they would earn interest but retain ready access to their funds. Repurchase agreements or “repos” developed to serve this need. A repo is a short-term collateralized loan that shares many characteristics with a demand deposit except that repos are not guaranteed. At the same time, large firms increasingly raised funds by issuing commercial paper in the market rather than relying on bank loans – with the money market mutual funds being large investors in this paper. Large banks, as well, came to rely at the margin on non-deposit funding through the interbank funding market. The Fed acted as the lender of last resort for this market. This system of market-based credit intermediation has been called the “shadow banking system”. The shadow banking system grew at a very fast rate over the past several decades. Chart 1 shows that by 1990, mortgage originations in the shadow banking system equaled originations in the banking system, and grew to more than double the level in the banking system by 2008. Chart 2 highlights the growth in securitization across many different asset categories besides residential mortgages, such as commercial real estate loans, auto loans, credit card loans and student loans.