The challenge of financing small and medium-sized enterprises (SMEs) is not unique to the United Arab Emirates. However, the UAE does have a relatively poor track record of bank funding for these businesses compared to regional and global norms. Data from the International Finance Corporation indicates that about 4% of system-wide bank loans in the UAE are allocated towards SMEs. Though this far better than the Gulf Co-operation Council average of 2%, it is well below the wider Middle East and north Africa figure of 8%. In the advanced economies of the Organisation for Economic Cooperation and Development this number rises to 22%.
For its part, the UAE government is working hard to address the problem. New regulatory measures introduced over the past few years, including a bankruptcy law, are helping. So too are steps to enhance banks’ access to data on SMEs, with the launch of commercial scoring on the Al Etihad Credit Bureau being a good example. Indeed, the authorities have listed SME contributions to non-oil gross domestic product (GDP) as a key component in the push towards a knowledge economy as part of the Vision 2021 national agenda.
Meeting targets
Given that SMEs account for some 94% of all the companies operating in the UAE and contribute about 60% to the country’s total GDP, these plans have an element of urgency about them. But early encouragement can be taken from efforts to tackle the challenge. “Total bank lending to SMEs in the UAE has been increasing over the past five years, even though it remains in the low single digits,” says Suvo Sarkar, senior executive vice-president and group head of retail banking and wealth management at Emirates NBD.
But time and persistence will be needed if the UAE is to meet its SME financing objectives. This is because the impediments are as numerous as they are complex, even if incremental progress is being achieved. For one, the majority of SMEs in the country are owned and managed by foreign nationals. And in the past, when times have been tough, many of these individuals have fled the country rather than face up to their financial obligations.
“SMEs in the UAE are largely owned by foreign nationals. The banks are, in part, concerned that these individuals could leave the country if their businesses were to fail,” says Jassim Al Bastaki, secretary general of the Emirati Entrepreneurs Association.
This situation is not helped by more traditional concerns around the ways in which SMEs audit and report their business activities. “Banks face a number of problems when lending to small businesses. A lack of audited and well-organised financials is one challenge. This is compounded by, in some cases, a failure to separate the financial information of the company’s owner from the entity itself,” says Mr Sarkar.
The right framework
Collapsing oil prices have hit the fortunes of many Emirati SMEs hard in recent years. Cancelled government contracts and late payments have, among other issues, led to growing pressure on banks’ exposure to the SME segment. Some lenders have reportedly experienced double-digit loss rates on their SME files, while others are now disengaging from unsecured lending. For the banks, getting the right lending framework and relationship with their SME customers is paramount.
“About 25% of SMEs in the UAE bank with Emirates NBD. We offer a full suite of products from transaction accounts, to foreign exchange services, to trade finance and insurance and investment products,” says Mr Sarkar.
“By looking beyond lending we can actually generate a much higher revenue share from SMEs. This is because our proposition is led through liabilities and not through assets. The diversified revenue stream of our SME business has ensured that the bank escaped the most recent downturn with minimal losses,” he adds.
Draft rules developed by the UAE central bank (being finalised as of mid-January 2018) will require the country’s lenders to develop dedicated SME units to be steered by a specialised strategy. Though lending targets will not be introduced under the new rules, their potential may be evaluated over the longer term, according to statements made by the governor of the central bank, Mubarak Rashed Al Mansoori, at the 2017 Middle East Banking Forum.
Better relations
Meanwhile, the modernisation of bankruptcy procedures in the UAE, coupled with the issuance of commercial credit scores by the Al Etihad Credit Bureau in August 2017, are helping to ease the strained the relationships between banks and SMEs. These measures, and others, are stoking optimism among those on the frontline of the SME financing challenge. In particular, growing volumes of data are making it easier for banks to engage with this customer segment.
“Twelve to 18 months from now it will be different. All of the initiatives taken by the government will begin to have an impact on the lending environment. This includes efforts to improve financial auditing and business administration among SMEs, as well as the grading of small businesses by the Ministry of Economy,” says Mr Al Bastaki.
For the UAE, the incentives of nurturing SMEs are compelling. The government’s ambitious plans for social and economic reform, detailed under its Vision 2021 strategy and other development plans, will only achieve meaningful outcomes if a thriving non-oil private sector can emerge. Empowering SMEs – and with them an independent and dynamic business culture – is widely accepted to be the best way of achieving that.
Translating profits
Nour Al Hassan, the chief executive of translation agency Tarjama, is a case in point. After starting her business with just $3000 in Jordan in 2008, Ms Al Hassan followed her core client base and relocated to the UAE in 2011. In that time, she has developed the business into a regional success story with a footprint across eight countries and a $6m turnover. But these achievements have not come easily.
“Securing funding for Tarjama was very tough in the early days. I kept a lean business model by locating a lot of back-office facilities outside of the UAE. Rents, as well as the cost of residency permits, are very high for businesses that are just starting out,” says Ms Al Hassan.
Though Ms Al Hassan suggests that the growing number of venture capital funds and angel investors in the UAE is helping early-stage enterprises to expand, there is still a long way to go. “Access to finance for SMEs is very restricted in the UAE. Start-ups and small business don’t have the right paperwork or collateral to facilitate a funding relationship with a bank,” she adds.
Social change
In the long run, businesses such as Tarjama look set to do more to address government goals around social and economic development than any policy or top-down directive can achieve. Ms Al Hassan currently has 73 women working for her company, as well as more than 300 female freelancers. In addition, Tarjama has trained more than 300 women in translation and business services since it was established. Indeed, Ms Al Hassan’s journey points to a gradually increasing number of female business owners in the UAE, though overall numbers are still low.
“Female entrepreneurship is improving in the UAE but it has a long way to go. If the percentage of women in the workforce is relatively low, the numbers are worse when it comes to those that start new businesses,” says Ms Al Hassan.
The UAE is clearly taking the challenge of SME financing seriously. And the optimism that bankers and business representatives have over the future of this funding challenge does seem warranted. The question facing those at the forefront of this problem is how quickly this positive momentum can be transformed into meaningful outcomes.
“I expect to see double-digit lending rates – as a proportion of total bank lending in the UAE – to SMEs in next three to five years,” says Mr Sarkar.
