Enhancing Governance and Strengthening the Regulatory and Institutional Framework for MSMEs Development in Jordan

medium enterprises (MSMEs) are important contributors to total employment and overall economic development. These enterprises can contribute vitally to productivity growth, and thus form a vital focus for emerging economies striving to expand employment. The Government of Jordan has shown strong commitment to support economic recovery and foster job creation by supporting MSMEs development as a priority in the reform program. Accounting for more than 99 percent of registered enterprises in Jordan, and around 71 percent of private sector employees, these enterprises are major contributors to the Jordanian economy and to its employment potential. Job creation and economic inclusion are key priorities for Jordan today—these goals will be advanced by improving the financial system, enhancing competitiveness, promoting governance and transparency, and fostering sustainable private sector-led growth. The Government’s Executive Development Program (EDP), underscores the importance of private sector development for job creation, and overall economic inclusion through MSME development and attaining a well-developed and diversified financial system. Most recently the Jordanian authorities stressed the need to ensure that the dividends of economic reforms are shared equally and fairly across the country.

Creating jobs and ending extreme poverty has become even more critical for Jordan: over the past few years, Jordan has witnessed sluggish economic growth, further exasperated by the unrest in Syria. The regional turmoil has reduced short term growth prospects for Jordan through sharp declines in Foreign Direct Investments (FDI), tourist revenues, and to some extent remittances, while the import bill increased as a result of higher commodity prices, adversely affecting the economic environment. The fallout from the neighboring Syrian conflict, in terms of both inflow of refugees and trade disruptions, is causing new concerns. This has had an adverse effect on Jordanian employment, especially those working in smaller enterprises, due to lower wages paid to refugees. The weakening economy is further undermined by social challenges, including unemployment and poverty. Unemployment averaged 13 percent in the last decade, with youth unemployment over 30 percent. Female unemployment (19.9 percent) is almost double male unemployment (10.4 percent). Absolute poverty according to Jordan’s 2012 Poverty Reduction Strategy is estimated at about 14.4 percent. Hence, it is essential that Jordan promote sustainable and inclusive growth to reduce unemployment, especially among youth and women, as well as in geographically and economically marginalized areas..

An inclusive financial system that is operating in a conducive and prudent regulatory and institutional environment can play a pivotal role in job creation. In that context, the MENA Transition Fund established under the Deauville Partnership is supporting Jordan Enhancing Governance and Strengthening the Regulatory and Institutional Framework for Micro, Small, and Medium Enterprise Development Project. This operation is prepared in a partnership between World Bank Group and the Arab Fund for Economic and Social Development (AFESD). The AFSED is playing a pivotal role in promoting MSMEs development in the Arab countries. The project aims at supporting the development of the institutional framework for microfinance and non-bank financial institutions (NBFIs), fostering consumer protection, and strengthening credit guarantee schemes, with the ultimate objective of improving MSMEs access to finance in a fair and competitive manner, while enhancing the governance and accountability. The project is in response to the request from the Central Bank of Jordan (CBJ), the project implementing entity, and a follow-up on the outcomes of the Arab Funds Coordination Group Meeting, which took place in Kuwait at the Arab Fund for Economic and Social Development (AFESD) on April 7, 2013. This project is also an example of excellent collaboration among the World Bank, International Financial Cooperation (IFC), and Consultative Group to Assist the Poor (CGAP); to support the Jordanian authorities in developing the MSME sector. Another key aspect is the fostering of partnership and coordination among donors and stakeholders that are active in MSME development in Jordan..

The project is transformative in nature, as it will foster a more efficient and conducive ecosystem for MSMEs in Jordan, through regulatory and institutional reforms that are transformational in terms of not only enhancing access to MSMEs, but also attaining a fair and more transparent system. This will be achieved by addressing major deficiencies in the financial infrastructure, through supporting the provision of credit guarantee schemes that will allow for risk sharing, incentivizing banks to lend to MSMEs. At the same time, enhancing the consumer protection mechanism will ensure better and fairer access to information and accountability to financial clients, especially the marginalized and small clients, who are not privileged, and lack financial knowledge and expertise. In addition, strengthening the institutional framework for the implementation of the microfinance regulation will boost the sector’s performance, encouraging its growth, and its outreach to underserved clients and Governorates..

This Transition Fund project is pivotal in that it complements and succeeded in leveraging funds for MSMEs in Jordan. The World Bank is providing a line of Credit amounting to US $70 million, and the AFSED is providing parallel financing of US$ 50 million through CBJ which would be on lent to banks and then MSMEs. The technical assistance and capacity building will complement these lines of credit, ensuring that these investment projects have a strong impact on the ground, reaching out to underserved areas and marginalized groups, in a fair, competitive, and transparent way, as well as adequately regulated and supervised to ensure compliance with prudential regulations and best practices, fostering financial inclusion..

At implementation completion, the outcome of this project is expected to contribute to transforming the underdeveloped MSMEs ecosystem to be more efficient, fair, transparent and prudently regulated, promoting a level playing field. It will enhance the accountability and governance of the system, while improving their access to financial services and products, as well as strengthening consumer protection, with the ultimate objective of sustainable private sector-led growth..