Saudi Arabia's SME lending numbers are rising, and the cause is structural

Saudi Arabia's small and medium enterprise lending volumes have been rising steadily, and the cause is more structural than cyclical. The credit is flowing because the infrastructure required to underwrite it — credit data, digital origination, and guarantee schemes — has been put in place over the past several years, and the infrastructure is now doing what infrastructure does: enabling volume that was previously uneconomic.

For years the kingdom's SME lending gap was described as a risk problem: banks would not lend to small businesses because the risk was unpriceable. The description was accurate but incomplete. The risk was unpriceable because the data to price it did not exist, the origination process to deliver it cheaply did not exist, and the guarantee to absorb a portion of it did not exist. Each of those was an infrastructure problem, and each has been addressed.

The credit bureau coverage is now broad enough to underwrite against. The digital origination platforms have reduced the per-loan cost to a level at which small-ticket lending is viable. The guarantee schemes have absorbed enough of the residual risk to change the bank's calculation. The lending volumes are rising because the economics of lending have changed, and the economics have changed because the infrastructure has been built.

The implication is that the SME lending growth is durable rather than cyclical. It is not a function of a low-rate environment or a government push; it is a function of a market that can now do something it could not previously do. The numbers will fluctuate with the cycle, as lending numbers do, but the floor beneath them has risen. That is what structural change looks like, and it is the most encouraging thing happening in Saudi banking.