Small and medium enterprises (SMEs) in the MENA region make large contributions to GDP – ranging from 30 per cent in Saudi Arabia to 70 per cent in Egypt – but lending to SMEs in the region is the lowest in the world, according to a new report.
A white paper on the SME sector in MENA, commissioned by Citi Foundation and Shell Foundation, found that lending to SMEs averages about two per cent in the GCC countries and 13 per cent in non-GCC countries, and that only 20 per cent of SMEs have a loan or line of credit.
In the UAE, SMEs account for about 90 per cent of employment and more than 60 per cent of the country’s GDP. However, the UAE’s total bank lending to these companies is only around 3.85 per cent, according to the Dubai Chamber of Commerce and Industry.
Lending is low because of the two main reasons, stated Sangeeta Badal, senior researcher in Entrepreneurship at Gallup.
Firstly, SMEs are seen as more risky by lending institutions because of high closure rates.
And secondly, a study done in 2009 by Dunn and Bradstreet found that most SMEs do not meet the bank’s loan criteria, thus leading to high rates of rejection of the loan applications.
According to Badal, the following pointers can improve financing to SMEs:
1. Formal capacity-building training for SMEs will lead to sustainable and stable businesses, thus making entrepreneurs better candidates for receiving loans.
2. The UAE government can help to improve SME’s access to finance by providing low interest loans from the central bank.
3. Increasing the availability of venture capital for entrepreneurs moving into more innovative sectors (energy, hi-tech etc).
Apart from financial constraints, another major obstacle hindering growth in the sector is the lack of management capacity.
“The UAE has high levels of start-up activity, but its business discontinuation rate is also quite high. Even though lack of access to credit gets significant media attention in UAE, the main challenge for SMEs is lack of management capacity.
“As small businesses grow in size, entrepreneurs need to learn how to hire and manage employees, create engaged customers, craft strategies for growth, and increase organisational performance through performance management,” she said.
The high number of startup procedures, lack of bankruptcy laws, and difficulty in contract enforcement also affect business start-up rate in the country.
Late last year, the UAE cabinet endorsed a federal law that aims to support and develop SMEs in the country.
The new law states that government bodies and GREs (government relates entities) must allocate five per cent of their budget for goods and services provided by SMEs or entrepreneurs.
It also called for establishing an SME board under the chairmanship of the economy minister and constituting representatives of concerned bodies.
“The recently passed law has the potential to transform the SME sector in UAE,” said Badal.
“Small businesses need customers to grow. By being the customer, the UAE government will provide much needed revenues to these SMEs. Procurement contracts from the government could potentially double the size of some, be a stabilising factor for others, and for many a contract from the government could open up new platforms for growth,” she said.
However, while the law is expected to encourage growth of existing SMEs, more needs to be done to encourage budding entrepreneurs.
“The UAE must continue to invest in R&D, cultivate an entrepreneurial mindset among the youth and identify entrepreneurial talent early (school-age children) to nurture the talent through special programmes and support,” she said.
“Today, SMEs in UAE are concentrated in less profitable, less capital-intensive, and low-tech sectors such as retail, restaurants, health, education and social services.
“My hope is that the sector will diversify into more profitable sectors, they will adopt technology to create innovative products and services for the market, thus continuing to expand in size creating more wealth and jobs in the coming decades,” she added.