What’s Holding Back Growth for MENA Businesses? Insights from Bank Al-Maghrib

Key Constraints on Firm Growth in MENA Region Identified by Bank Al-Maghrib Study

A recent working paper from Bank Al-Maghrib (BAM) has pinpointed political instability, limited access to finance, and informal competition as the primary obstacles hindering firm growth across the Middle East and North Africa (MENA) region. The study, authored by Hicham Doghmi and Kamal Lahlou, analyzed data from 18,697 formal firms across 11 MENA countries between 2010 and 2024, including a significant contribution of 1,860 Moroccan firms.

Regional Challenges and Moroccan Outperformance

While firms in the MENA region experienced an average annual employment growth of 3.5%, sales declined by 5.5% annually – a reflection of challenging economic conditions. However, Moroccan firms bucked this trend, demonstrating stronger performance with 7.4% annual employment growth and 9.2% sales growth.

Political Instability and Financial Barriers as Major Obstacles

The research revealed that nearly half (47.5%) of surveyed firms considered political instability a major obstacle, followed by corruption (44%) and limited access to finance (24.1%). Statistical analysis confirmed that political instability reduced employment growth by 1.88 percentage points, while access to finance constraints cut it by roughly 1 percentage point, and informal competition lowered it by 0.77 percentage points.

Small Firms Bear the Brunt of Constraints

Small businesses, representing 67% of the sample, were found to be significantly more vulnerable to political instability and financing barriers compared to larger enterprises.

The Power of Formal Finance

Access to formal bank financing proved to be a significant growth driver. Firms with credit lines or loans experienced 1.09 percentage points higher employment growth and 1.68 percentage points higher sales growth. Overdraft facilities yielded even greater gains, boosting employment by 1.86 percentage points and sales by 3.35 percentage points. Despite this, financial inclusion remains low, with only 13% of firms holding a loan or credit line and 24% having access to overdraft facilities. Conversely, reliance on informal financing sources like owner’s loans and trade credit negatively impacted performance.

Technological Capabilities and Investment

The study highlights a crucial link between constraints and technological capabilities. Political instability and financing barriers were shown to erode firms’ ability to invest in research and development (R&D), export, and innovate. Constrained firms were significantly less likely to engage in these activities, ultimately dampening their growth potential.

However, firms that invested in physical capital, R&D, workforce training, and digital tools consistently achieved stronger growth. Exporters saw a 2.5 percentage points increase in employment growth, while firms offering formal training programs experienced a 2 percentage points gain.

Size, Age, and Affiliation Matter

The research also uncovered interesting nuances in the relationship between firm size and growth. While smaller firms typically grow faster, this advantage diminishes as firms grow, reversing entirely at a threshold of 275 full-time employees. Larger firms beyond this point demonstrated faster employment growth. Younger firms also exhibited significantly faster growth rates than older ones. Furthermore, firms affiliated with larger parent companies and foreign-owned firms showed improved performance.

Macroeconomic Stability and Financial Inclusion are Key

At a country level, macroeconomic stability and institutional quality were found to be crucial. Economies with lower inflation, higher GDP growth, and larger populations fostered stronger firm performance. Sound governance, flexible labor regulations, reduced bureaucratic costs, and impartial public administration also correlated positively with firm expansion. The study also revealed that broader financial inclusion within a firm’s geographic area and sector benefits individual firms, suggesting positive spillover effects.

Policy Recommendations for Sustainable Growth

The authors conclude with a call for a comprehensive policy response focused on strengthening governance, reducing bureaucratic burdens, maintaining macroeconomic stability, and improving access to the formal financial system. Targeted financial instruments to de-risk innovation and increased investment in human capital are also recommended to unlock the technological capabilities essential for sustained private sector expansion across the MENA region.