The SME Credit Crunch in Saudi Arabia. Why Traditional Lending No Longer Works?

Saudi Arabia’s small and medium-sized enterprises (SMEs) find themselves in a paradox. They are lauded as key engines of growth and job creation, yet they face an acute credit crunch that stifles their potential. In advanced economies, SMEs contribute around 70% of GDP, but in Saudi Arabia, their contribution stands at roughly 20%. SMEs make up nearly 1.3 million businesses in the Kingdom (almost all of the private sector) and account for about 45% of employment, underscoring their importance to economic diversification. Saudi Vision 2030 explicitly aims to elevate SME contribution to GDP from current levels to 35% by 2030. However, despite this recognition and government support, access to finance remains a major hurdle. Banks have historically allocated only a tiny fraction of their lending to SMEs – as low as 4% of total bank credit in 2018, inching up to about 8% by 2024. This leaves a financing gap estimated at over SAR 640 billion (>$170 billion) for Saudi SMEs. In short, Saudi SMEs are the backbone of the economy, but they are starved of the credit needed to thrive. Why is this the case, and what can be done about it?

SMEs in Saudi Arabia – Big Role, Limited Credit.

Saudi authorities have launched initiatives to boost SME growth and financing (such as MonshaatSA ’s nationwide SME programs), reflecting the sector’s crucial role in diversification. SMEs comprise 99% of businesses in the Kingdom and are seen as a pillar of Vision 2030’s non-oil growth strategy. Yet their access to finance is disproportionately low. As of 2024, bank loans to SMEs totalled roughly SAR 250 billion, barely 8% of total lending – a modest improvement from just 2-5% a few years prior. The government’s Financial Sector Development Program has set ambitious targets to change this, aiming to raise SME lending to 20% of bank credit by 2030. Achieving that goal is essential to unleash SMEs’ full contribution to GDP (targeted at 35% by the decade’s end) and to generate jobs.

This credit gap isn’t due to a lack of demand. In fact, surveys indicate that about one-third of firms in the Middle East (MENAP region) cite access to credit as a major constraint on growth. In Saudi Arabia, thousands of entrepreneurial companies – from tech startups to manufacturing workshops – remain under-financed or unbanked. The result is a significant opportunity cost for the economy: untapped innovation, slower SME expansion, and heavier reliance on large enterprises or government spending for growth. The SME financing paradox in Saudi Arabia is clear: these firms are expected to drive economic diversification, but traditional financing channels have not kept up with their needs.

Why Traditional Lending Models Are Failing SMEs?

The core of the problem lies in how traditional banks lend and why that model no longer works for many SMEs. Commercial banks tend to be conservative and risk-averse in their credit practices, favouring larger, well-established borrowers. Several inherent challenges make it difficult for SMEs to obtain bank loans:

• Limited Financial History & Collateral: Many SMEs are young companies without lengthy credit histories or substantial assets to pledge. Banks typically rely on years of financial statements and collateral (often real estate) to secure loans – criteria that small businesses often can’t meet. In emerging markets, SMEs’ short track records and lack of collateral are the primary reasons they struggle to access credit.

• High Perceived Risk: Traditional underwriting views SMEs as inherently riskier than large corporates. Without deep data on SME borrowers, banks fear higher default rates. As a result, stringent requirements and lengthy due diligence are imposed, or applications are simply rejected. In the MENAP region, banks often perceive SME lending to entail higher credit risk, leading to restricted lending capacity.

• Cost-to-Serve and Profitability: Assessing and managing many small loans can be costly for banks. It takes nearly the same effort to underwrite a $50,000 loan as a $5 million loan, but the smaller one yields far less interest. This economics of scale drives banks to prioritize big corporate loans or government projects, not dozens of small SME facilities.

• Bureaucracy and Slow Processes: Traditional loan application processes can be slow and paperwork-intensive, which discourages fast-moving entrepreneurs. An SME might wait months for a credit decision, only to be declined due to minor compliance issues. Such delays are ill-suited to SMEs that need agile financing (for example, to buy inventory for a new contract on short notice).

• Limited Credit Data: Until recently, Saudi Arabia lacked comprehensive SME credit information systems. While reforms are underway (such as a new SME credit bureau and improved credit reporting), historically the opaque financials of SMEs made it hard for banks to evaluate them accurately. The Kafalah | كفالة loan guarantee program has mitigated this by guaranteeing some SME loans, but it has only scratched the surface in terms of bridging the overall gap (around SAR 67 billion in guarantees as of early 2022).

These factors have led to a situation where traditional lending channels simply aren’t serving SMEs at scale. Even well-run small businesses can find themselves rejected for loans due to collateral shortfalls or “one-size-fits-all” credit policies. In a healthy financial ecosystem, credit should flow to viable SMEs so they can invest, grow, and hire. When that doesn’t happen, we witness what is effectively a “credit crunch” for SMEs – a systemic shortfall in funding availability, even when liquidity exists in the banking system. Saudi banks, flush with deposits and often investing in low-risk assets, have been slow to calibrate their models to SME needs. This mismatch signals that traditional lending in its current form is ill-equipped to finance the new wave of Saudi entrepreneurs.

Fintech to the Rescue – Bridging the SME Credit Gap.

If old models are falling short, innovative fintech solutions are stepping in to fill the void. Around the world, financial technology firms are reimagining how credit can be delivered to small businesses – and Saudi Arabia is starting to see the benefits of this revolution. Fintech lenders and platforms are leveraging technology to solve the very problems that plague traditional banks:

• Data-Driven Credit Scoring: Fintech companies harness alternative data sources to evaluate SME creditworthiness. Rather than relying solely on audited financials or collateral, they analyze real-time business data – such as sales receipts, bank account flows, supplier payments, and even customer reviews. By applying AI and machine learning to this data, fintech lenders can build a more nuanced risk profile of an SME. This reduces the need for collateral and can bring many “thin-file” businesses into the fold of creditworthy borrowers

• Automated Underwriting: Through automation, fintech platforms cut down the cost and time of loan processing. Sophisticated algorithms can instantly verify documents, assess risk, and make lending decisions in minutes. This means faster approvals (often same-day funding), which is crucial for SMEs that might need quick working capital. Automation also lowers overhead, making small loans economically viable to offer.

• Innovative Loan Products: Fintech innovators are offering products tailored to SME needs, such as invoice financing, supply chain finance, and revenue-based lending. For example, an SME can get an advance on its pending invoices or a loan repaid as a percentage of its monthly revenues – structures that align repayment with cash flow. These flexible models provide credit when banks won’t, using the business’s ongoing transactions as security instead of fixed assets.

• Platform Lending and Crowdfunding: Online lending marketplaces connect SMEs directly with investors (or alternative capital) via crowdfunding or peer-to-peer models. In Saudi Arabia, debt crowdfunding platforms like Lendo have emerged, allowing individuals and institutions to fund SME loans. This taps non-bank pools of capital to support small businesses. Notably, Lendo | ليندو’s platform, which recently attracted a funding facility from J.P. Morgan, highlights the appetite to finance Saudi SMEs outside traditional channels.

• Embedded Finance: Another trend is embedding credit offerings within digital platforms that SMEs already use. For instance, e-commerce marketplaces or payment processors can offer instant loans to merchants based on their sales data. This integration of finance into SME tools provides seamless access to credit right at the point of need, bypassing the usual bank loan application altogether.

The impact of these fintech solutions is promising. Globally, 40% of formal MSMEs in developing countries face a $5.2 trillion financing gap, but fintech advancements are closing that gap bit by bit. In emerging markets, tech-driven lenders are proving that many SMEs are creditworthy when you look at the right data. By using unconventional metrics (like online sales, utility payments, or supply chain records), they uncover credit signals that traditional banks miss. Fintech players are also more willing to serve micro and small loans at scale, thanks to automation and digital distribution that keep costs low. As a result, previously “invisible” SMEs are getting financing offers in a matter of clicks.

Saudi Arabia has recognized this potential. The Kingdom has nurtured a fintech ecosystem (through sandbox regulatory programs and new licenses) to spur alternative financing. MonshaatSA's Fintech Lab and the Saudi Central Bank – SAMA’s sandbox has allowed several SME-focused fintech startups to launch. Digital lenders now complement banks by catering to underserved segments. For SMEs, this means more options: if a bank turns them down, a fintech platform might still say yes – and faster.

This is where we also come in. Abwab.ai provides an AI-powered credit intelligence and underwriting platform tailored for the Saudi market. In practical terms, Abwab’s technology ingests unstructured data from SMEs: invoices, bank statements, accounting records – and translates it into actionable credit insights for lenders. By analyzing patterns in cash flow, buyer-supplier networks, and even industry trends, the platform helps identify healthy businesses that might be overlooked by traditional scoring. The result is that banks and financing companies can make smarter, faster lending decisions with confidence. Our mission is to bridge the massive SME financing gap in the Kingdom, enabling more inclusive lending. As the Founder & CEO Baraa Koshak describes, it offers “efficient, intelligent, and proactive underwriting” aligned with Saudi Vision 2030 goals. Essentially, Abwab.ai acts as a high-tech bridge between lenders and SMEs – reducing risk through better data and opening the flow of credit to deserving small businesses.

This new wave of fintech solutions – from AI-powered credit platforms like Abwab.ai to crowdfunding and digital banks – is starting to reshape the lending landscape. They complement the banking sector by serving SMEs that banks find hard to reach, and they push the boundaries on how credit risk is assessed. While fintech is not a silver bullet (and prudent risk management remains vital), it offers a path to systematically close the SME financing gap that traditional lenders left open. In fact, the presence of these agile players is even encouraging big banks to up their game – many banks are now partnering with fintechs or building their own digital SME lending capabilities, recognizing that old models must evolve.

The GCC Context: A Region-Wide Challenge?

Saudi Arabia is not alone in this SME credit conundrum. Across the Gulf Cooperation Council (GCC) region, economies face a similar mismatch between the importance of SMEs and their access to finance. SMEs constitute the vast majority of businesses in every GCC country – often upwards of 90-95% of all registered companies – yet banks have historically devoted only a small portion of their lending to them.

In the United Arab Emirates, for example, SMEs account for over 95% of enterprises and 86% of private-sector employment mirroring the SME dominance in the economy. However, as of mid-2024, loans to SMEs represented just 9.5% of total business sector credit in the UAE. This gap is not unique; a few years ago in the UAE it was reported that only ~4% of outstanding bank loans went to SMEs, underlining a regional pattern. Other GCC states show similar trends. In Oman, Bahrain, Kuwait, and Qatar, SME lending has traditionally been in single-digit percentages of bank portfolios, even though governments in each country have launched funds and guarantee schemes to encourage more SME financing.

GCC governments clearly recognize the issue and are taking steps to address it. The UAE has established a dedicated Emirates Development Bank (EDB) strategy to increase SME financing (providing subsidized loans and credit guarantees), and introduced initiatives like the SME Finance Facilitator Program in Abu Dhabi to improve access. Bahrain and Dubai have set up fintech sandboxes to attract alternative lenders and P2P financing platforms. Saudi Arabia itself, through Monsha’at, has not only the Kafalah | كفالة guarantee program but also an SME funding portal to connect businesses with financing offers.

Despite these efforts, the culture of bank lending in the GCC has been slow to change, partly due to longstanding reliance on oil revenues and government spending. Banks in the region, often large and well-capitalized, found ample low-risk lending opportunities in corporate and government lending. But with economic diversification now a top priority for all GCC states, empowering SMEs is on the national agenda. This means the region is ripe for a surge in fintech-led SME financing. Indeed, GCC fintech startups focusing on SME credit have started gaining traction, and cross-border investments (like the Lendo | ليندو-J.P. Morgan partnership in KSA) indicate international interest in the sector. In the coming years, we can expect GCC banks and fintechs to increasingly collaborate – blending the trust and capital of banks with the technology and agility of fintechs.

Global Trends – Toward a New Era of SME Finance.

Zooming out to the global stage, the push to improve SME financing is part of a broader trend reshaping financial services. Worldwide, SMEs are recognized as fundamental to economic growth, comprising about 90% of businesses and more than 50% of employment globally. Yet the story of constrained credit is a common one, especially in emerging markets. According to the International Finance Corporation, 40% of formal SMEs in developing countries are credit-constrained, contributing to a financing gap as large as $5.2 trillion globally. This “silent” credit gap has prompted innovation in many corners of the world.

Key global trends in SME finance include:

• Rise of Alternative Lenders: In the US and Europe, fintech lenders and non-bank financiers have captured a growing share of SME loans. Online lending companies leverage technology and often lend out funds raised from institutional investors, bypassing traditional banks. Their success has demonstrated new ways to underwrite SMEs – for instance, using FICO-alternative scores, cash-flow analysis, or sector-specific models. The growth of peer-to-peer business lending in the UK and marketplace lending in the US points to a permanent shift in how SMEs get funded.

• Open Banking and Data Sharing: Policies like Open Banking (pioneered in the UK and spreading globally) force banks to share customer data securely with third-party providers at the customer’s request. This empowers SMEs to share their bank transaction history with alternative lenders or fintech platforms, which can then assess creditworthiness more effectively. Open Banking has facilitated better credit offers for SMEs as fintechs can access rich banking data without being the incumbent bank. Countries in Europe, Asia, and the Americas are adopting similar frameworks, fueling a more competitive SME lending market.

• Big Tech and E-commerce Finance: Large technology companies have also entered the SME finance arena. For example, e-commerce giants and payment processors (like Amazon, Alibaba Group, Square, and PayPal ) now extend loans to small businesses using data from their platforms. An online seller who might be too risky for a bank can get a loan from Amazon Capital based on their sales turnover. This trend blurs the line between commerce and finance, but it has unlocked credit for many businesses that operate in the digital economy.

• AI-Powered Credit Analysis: The use of Artificial Intelligence globally is enabling more sophisticated analysis of SME risk. Companies are deploying AI to predict default probabilities by examining patterns across thousands of data points – something impractical manually. For instance, in markets like India and Africa, startups use AI to analyze smartphone data or supply chain records to score micro-businesses. While concerns about algorithmic bias and regulatory oversight remain, AI’s ability to process non-traditional data offers a powerful tool to expand SME credit. In fact, the Bank for International Settlements – BIS finds that fintech and big tech lenders, by exploiting data and digital platforms, “could reduce the need for collateral and improve SMEs’ access to credit” though they caution it’s not a panacea on its own.

• Policy Support and Guarantees: Globally, especially after the COVID-19 pandemic, many governments have bolstered support for SME financing. Loan guarantee schemes (similar to Saudi’s Kafalah | كفالة) have been expanded from Europe to Asia, recognizing that temporary de-risking can incentivize banks to lend to SMEs. Central banks and development finance institutions are also actively investing in SME-focused funds and fintech programs, signalling a policy shift to ensure SMEs get the financing necessary to drive recovery and growth.

The net effect of these trends is a slow but steady democratization of SME finance. Traditional banks are no longer the sole gatekeepers. A small business today might get financing from a microfinance institution, a crowd of retail investors online, a supply chain platform, or an AI-driven credit fund – or, ideally, from a bank that has adopted some of these innovations itself. The competitive landscape is pushing all lenders to become more SME-friendly. In developed markets, we’ve seen SME loan growth through non-bank channels outpace that of traditional banks in recent years. In emerging markets, fintech credit is still a fraction of total lending, but it is the segment growing the fastest.

For Saudi Arabia, these global developments provide both lessons and encouragement. They show that the SME financing gap can be narrowed with creativity, technology, and supportive policy. Saudi regulators and innovators can leapfrog by adopting proven models from abroad (for example, exploring open banking data for credit scoring, or fostering a local peer-to-peer lending market). At the same time, Saudi Arabia’s unique market – with its own data ecosystem and regulatory environment – can become a testbed for homegrown solutions like Abwab.ai’s platform that are tailored to local needs.

Toward a Smarter, More Inclusive Lending Ecosystem.

In conclusion, the SME credit crunch in Saudi Arabia is a challenge that can no longer be ignored, but it is also an opportunity. Traditional lending models served an older economic structure well, but they are ill-suited for the dynamic, SME-driven economy that Saudi Arabia is building under Vision 2030. Old paradigms – heavy collateral, lengthy paperwork, “one-size-fits-all” risk metrics – are giving way to new paradigms centred on agility, data intelligence, and inclusivity in financing.

The transformation is already underway. Banks in Saudi Arabia are beginning to collaborate with fintech startups, join digital financing platforms, and revamp their SME units with technology. The government continues to push regulatory reforms that encourage competition and innovation in lending. Meanwhile, fintech innovators like Abwab.ai are leading the charge by providing the tools and platforms to make smart lending at scale a reality. By leveraging AI and deep credit analytics, they enable lenders to confidently extend credit to SMEs that were previously left out – smarter, faster, and with controlled risk.

The stakes are high. If Saudi Arabia can solve its SME financing puzzle, the payoff will be enormous: a thriving mid-market sector, hundreds of thousands of new jobs, and a more diversified, resilient economy less tied to oil cycles. The current credit crunch need not be a permanent barrier. With policy vision, financial innovation, and technology working hand in hand, the Kingdom can usher in a new era where no good business idea fails just because of lack of funding. In this journey, the emergence of fintech-powered credit solutions is not just timely – it’s indispensable. The message from the marketplace is clear: traditional lending alone no longer works for SMEs, but with the right innovations, lending to SMEs can work better than ever. Saudi Arabia’s entrepreneurs are ready to write the next chapter of growth; it’s up to the financial sector to provide them with the ink – and thanks to fintech, that ink is now flowing more freely than before.

Sources:

🇸🇦 Saudi-Specific Sources

1. Saudi Vision 2030 official documents – SME contribution targets, diversification goals.

2. MonshaatSA (General Authority for SMEs) – SME statistics, financing initiatives, Kafalah | كفالة program updates.

3. Saudi Central Bank – SAMA – SME lending data, financial sector reports.

4. Fintech Saudi | فنتك السعودية Annual Report 2023-2024 – Growth in fintech players, regulatory support.

🌍 Global & GCC Insights

1. IFC - International Finance Corporation – MSME Finance Gap Report – $5.2 trillion global SME financing gap.

2. The World Bank Enterprise Surveys (MENAP region) – Barriers to SME growth, credit access.

3. PwC Middle East – Private Credit in GCC – Outlook for non-bank SME lending in the region.

4. Ministry Of Economy, UAE + Emirates Development Bank (EDB) Reports – SME lending percentages, national initiatives.

5. GCC SME landscape briefings by Oxford Business Group – Cross-country comparisons on SME credit.

📊 Fintech & Lending Trends

1. Bank for International Settlements – BIS Reports – AI in credit risk assessment, fintech and big tech lending.

2. World Economic Forum (WEF) – Future of SME Financing Reports – Trends in AI credit scoring, embedded finance.

3. McKinsey & Company – Fintech in the Middle East – Alternative credit models and digital disruption.

4. International Monetary Fund MENAP Regional Outlook – SME lending constraints in emerging markets, especially Saudi Arabia.

5. CB Insights / Crunchbase – Funding flows into fintech lending startups across MENA.