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A string of debt fleeing SME owners have led banks to tighten their belts on lending, but the businesses that play by the rules should not be paying the price

Blame game: addressing the UAE's SME debt dilemma

When Simon Ford fled the UAE after the collapse of his online leisure business Bluebanana.com in 2009, he wrote an emotional public letter detailing his plight and promising to repay every penny.

“I am not running away from debt,” he said, “I am… getting out of a country which, due to the lack of structured bankruptcy laws and a banking system which has zero flexibility on loan repayments, drives people to make horrible decisions. I am sorry, Dubai.”

Investors who had lost hundreds of thousands of dirhams in the failed business told Arabian Business at the time that Ford’s false promise made their “blood boil”.

Rohit Garg is the head of Mashreq’s NeoBiz, the first digital business banking platform in the UAE

“I don’t think I or anyone else will ever be paid,” investor Nazar Musa said.

A decade later, Dubai is yet to hear from Ford.

The debt dilemma

It is no wonder that in 2015, banks in the UAE began working together to prevent owners of small and medium-sized enterprises (SMEs) from fleeing the country with unpaid debt, a trend that had cost the emirates a staggering AED5bn ($1.4 bn) in the year alone, UAE Banks Federation chairman Abdul Aziz Al Ghurair told Arabian Business at the time.

“The problems with SME banking are fear based,” says Steve Cronin, co-founder of personal financial development platform Dead Simple Saving.

Steve Cronin, founder of Dead Simple Saving

“[SME owners] are afraid that their clients won’t pay them; they are afraid of banks chopping access to their facilities; they are scared of their cheques bouncing and then subsequently being put behind bars,” he says.

But should the majority of SMEs – which make up 90 percent of all companies in the UAE – suffer because of those the few who flee? They’re suffering nonetheless.

As many as 65 percent of SME owners in the UAE said they struggle with setting up a company bank account in the emirates, according to a report by global consultancy Roland Berger, while less than 4 percent of bank lending goes to small and medium enterprises.

“The complaint five years ago used to be that I can’t get funding for my SME. Now the complaint is I cannot open my account,” Cronin says.

“I talked to a lot of SME business owners with close to AED10m  turnover and above and these people say ‘I cannot open a bank account’. It’s as if a bank account is a privilege rather than a right”, he adds.

While SMEs have also faced increasing pressure amid a gradual drying up of liquidity in line with weak oil prices and slowing economic growth, a number of financial institutions have introduced initiatives aimed at improving the SME funding gap, which sits at an overwhelming $260bn in the Middle East and North Africa (MENA).

The $545m Khalifa Fund, for example, offers low-interest loans and seed capital to new SMEs, while the Emirates Development Bank (EDB) in February announced the launch of a $27.2m Credit Guarantee Scheme in support of smaller businesses.

Major institutions like Emirates NBD and Mashreq have also started rolling out digital banking options tailored to SMEs such as E20 and NeoBiz, respectively. Meanwhile, independent app Xpense offers digital business accounts to freelancers, solo entrepreneurs, and start-ups and Now Money acts as a digital payroll and accounts solution for companies and their low-income employees.

Banks in the UAE are recognising the importance of creating a flourishing ecosystem for SMEs

But Cronin says digital banks ultimately make no difference, as they have the same credit and account systems as regular banks. “It’s great that these new digital banks are coming, but don’t stick a battery on a camel and call it a Tesla. Make it an innovative new bank that doesn’t just have the same credit and account systems underneath. But at the moment all of my entrepreneur friends are saying it is a horrific experience,” he says.

Don’t blame it on the banks

Mashreq bank’s Head of NeoBiz, Rohit Garg, says SMEs must be “bankable” if they apply for loans, citing inept business plans, disorganised financial records and a lack of collateral as key issues.

“So it’s not that banks are unwilling to lend, but you have to be bankable,” he says.

With only 50 percent of businesses maintaining audited financial statements, according to a survey by support and information platform Dubai SME, Garg questions the credibility of SMEs.

“How can any bank borrow money from depositors and give it out to the SMEs when this is the case?” he says, but adds that banks are trying to make it easier for SMEs to open bank accounts.

While Cronin argues that you don’t need a loan to start a company – “you need a good idea and good execution” – he says banks must lessen the burden of setting up bank accounts for SMEs. “When [they] say [they] will open an account in 20 minutes – it [should] take 20 minutes and not one month. This is what must be expected out of the banks,” he says.

Made in Dubai

With around 400,000 SMEs already contributing over 60 percent of the non-oil economy and providing 86 percent of the private workforce, according to a 2019 report by the National Bank of Fujairah NBF); and the Dubai SME 2021 Strategic Plan aiming to increase the contribution of SMEs to the country’s GDP from approximately 40 percent to more than 45 percent in the next two years, perhaps it’s time that banks started believing in SMEs again.

Because while there are many like Bluebanana.com, there are also many like Careem, Souq and The Entertainer – and they haven’t fled neither debt nor Dubai.

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