Breaking down the barriers for small businesses


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If you’re thinking of setting up a small business in the Middle East, this week’s cover story might just make you think again. Launching any new venture is hard enough as it is; you need to sacrifice time and effort in huge quantities. But most new companies also need capital, and that’s where this region is failing to help its entrepreneurs.

Did you know that only two percent of total loans in the Gulf are lavished on SMEs? In the UAE, that figure is four percent, but considering that the segment contributes an estimated 33 percent to GDP, while employing up to 80 percent of the private sector, and accounting for 95 percent of businesses in Dubai alone, that number is still pretty shocking. In more developed markets, up to 30 percent of loans are dished out to smaller enterprises.

Making matters worse is the fact that only 20 percent of SMEs in the MENA region actually have a bank account.

That means that on the occasions where financing is offered, it tends to be to business owners in a personal capacity, thus defeating the whole idea of limiting your liability in the first place. And even when SMEs can get a loan, these are often at extortionate rates. 

However, there are lessons to be learnt from elsewhere in the region. In Lebanon, the percentage of total loans to small businesses sits at a healthy 26 percent, with a similar figure in Morocco. How is it that Lebanon can do what the deep-pocketed Gulf can’t? The answer lies in a Lebanese company called Kafalat, which was set up in 2000. It’s a government-sponsored programme that helps local SMEs by providing loan guarantees to commercial banks, thus largely obviating the risks for the lender.

One of the driving forces behind that initiative was Dr Nasser Saidi, who we interview in this issue. Saidi is currently hard at work developing two regional initiatives that are designed to help smaller enterprises. He is vice chairman of Eureeca, a crowdfunding platform that fully launched only last month, and is also helping build Nexpand, a second-tier marketplace (similar to the London Stock Exchange’s Alternative Investment Market) that will be bolted on to regional bourses and provide an avenue for local SMEs to go public.

If successful, both initiatives should go some way to alleviating two of the key difficulties that smaller companies face in the Middle East; financing and going public. But, at the same time, there is also a need for local governments to do more.

In the UAE, progress is perhaps a little bit faster than elsewhere in the Gulf. A major barrier to financing will come down when the government-owned Al Etihad Credit Bureau becomes fully active at some point next year.  While a credit history will take time to build, this should make the cost of financing for SMEs less expensive, while also removing some of the risk for nervous local lenders.

But the onus isn’t just on governments. Part of the problem for lenders, says Hamad Buamim, the director general of the Dubai Chamber, is that many of the proposals that end up on their desks are aren’t fully prepared or thought through. That’s why the chamber’s Tejar Dubai initiative plans to team promising local entrepreneurs up with well-known business leaders in order to work out a solid financial plan. If the chamber endorses the plan, it will then help coordinate loans with partner lenders. At present, this scheme is limited to Emirati entrepreneurs, but the chamber hopes to roll it out to expatriates in the near future.

All this should add up to a more positive atmosphere for entrepreneurs in the near future, but it will take time. If a Kafala-type scheme is also introduced by regional governments, then this process can only go quicker.

Ed Attwood is the editor of Arabian Business.

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Posted by: Sagar

for SME financing look at Gulf Finance Corporation.

Posted by: Alex

Correct, all the rules and regulations of larger corporations without the financing tools available... All the banks talk about SME focus, yet none are really embracing it with the passion required to make this a sector for growth and employment.

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