Banks should do more to help the private sector

Is it time for UAE banks to roll out their own funds for SMEs, asks Ed Attwood
By Ed Attwood
Sat 19 Oct 2013 10:24 AM

Can Gulf governments continue to play such a central role in diversifying local economies? That’s a question we posed to Qatar’s former economy and trade minister, Sheikh Mohamed AJ Althani, in this week’s issue. His argument is that the state can only do so much, and that the private sector needs to do more.

“No-one has ever succeeded in diversifying in the Gulf, because if you want to succeed in diversification you need to create the platform and the legal structure and the rule of law to make sure that private sectors and the innovators have access to the money — to whatever they need, a plot of land, a lease, a port, an airport — to diversify the economy,” Sheikh Mohamed told us. “The state cannot diversify the economy; the state can make the major projects, yes, the billions of dollar projects, fine, but the state cannot go into the diversified world.”

So what needs to be done to help this process? Part of the problem lies with the banks. The Gulf’s lenders appear to be cashing in this year, after a difficult period of high provisioning, largely associated with the credit crunch and significant lending to government-related entities. Last month, Abdulaziz Al Ghurair, chairman of the UAE’s banking lobbying group, said that local lenders would post profits growth of around 20 percent this year. His own bank, Mashreq, is expected to see profits rise by 40 percent, after a 67 percent increase in 2012.

Much of the growth in retail lending is being driven by consumer credit, but the big worry is that smaller companies, the bedrock of local economies, are missing out. Last week, the chief executive of the Khalifa Fund for Enterprise Development — a government body that provides financing to SMEs — complained that not enough is being done to support the companies on which the future of the UAE economy will rest.

“Our finance industry knows what to do, but there is nothing encouraging them to do it,” he said, in comments reported by The National newspaper. “Why are our banks posting record profits and the SME sector [is] not being part of the conversation? The finance sector is missing out; banks should not be only about giving loans, but making an investment in small and medium-sized businesses and seeing what the returns are.”

It’s tough to disagree with Abdullah Saeed Al Darmaki’s point, especially in the light of recent moves by HSBC and Barclays. In June, HSBC decided to give some of its SME clients the boot after an internal review that suggested it should concentrate on larger, more international firms. Last month, Barclays followed suit by cutting off services to at least 500 account holders due to a regulatory review. Many of those were SME accounts, and the sudden move led to bounced cheques, and the inability to pay salaries.

From the banks’ point of view — where is the motivation to provide financing for smaller companies? It costs them just as much to do the assessment for a loan for, say $10m, as it does for a loan worth $100,000 — and they will make far more money lending to the bigger corporates.

Apart from input from government entities — like the Khalifa Fund in Abu Dhabi, the Mohammed Bin Rashid Fund in Dubai and Enterprise Qatar — there is not enough being done by large private-sector companies to encourage the development of SMEs in the region. That’s why it was refreshing to hear Mohamed Alabbar, chairman of Emaar Properties, announce plans to launch a $100m fund to help Arab entrepreneurs last week.

Perhaps it’s time for the country’s banks to step up to the plate and roll out their own funds for SMEs? It’s unlikely that they’ll see much in the way of short-term profits, but the long-term results of investing in smaller companies could well pay off, as well as building closer ties with the local community.

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