By Sarah Townsend
The chairman of the UAE’s Khalifa Fund for Enterprise Development is working to encourage more Emiratis to start their own businesses despite low liquidity and other challenges. But, he warns, too many are choosing the easy option, proposing yet more coffee shops, nail bars and gyms.
Small-to-medium-sized enterprises (SMEs) in the Gulf are in a tough position in an era of low oil prices and decreased bank liquidity. On the one hand, governments are pinning their hopes on start-ups to lead economic diversification, setting ambitious targets for their contribution to gross domestic product (GDP) and jobs.
On the other hand, banks have tightened lending, making it more difficult for SMEs to secure crucial funding to get off the ground or scale up operations, and thus have a meaningful impact on the economy.
More than half (51 percent) of UAE-based SMEs say lack of funding is their greatest barrier to growth, according to a survey of 100 start-ups conducted in November by crowdfunding website Beehive.
In the UAE, SMEs account for at least 60 percent of non-oil GDP and are targeted to increase their contribution to 70 percent by 2021, according to Dubai SME, an agency of the Dubai Department of Economic Development and mandated to develop the SME sector.
However, the funding gap for SMEs in the Middle East and North Africa (MENA) is an estimated $240bn, according to the International Finance Corporation (IFC), with only 8 percent of bank lending going to the sector across the region. In the GCC, the figure is much smaller at 2 percent, the IFC said in a 2014 report.
This is where the UAE’s Khalifa Fund comes in. The UAE government-backed fund, chaired by veteran industrialist Hussain Al Nowais, provides zero-interest loans to UAE-based, Emirati entrepreneurs.
The fund has been up and running for eight years, and provides loans ranging in size from AED100,00 ($27,200) to AED10m ($2.72m) — although the typical award size is relatively small, at around AED1m ($270,000).
“The Khalifa Fund is here to step in and fill the funding vacuum,” Al Nowais tells Arabian Business in an interview in Abu Dhabi last month.
However, he acknowledges that the regional economy is currently vulnerable and that is impacting on the level of financial support available to SMEs.
“Things are a bit difficult this year. We’re blessed that our economy in the UAE is not solely dependent on oil and our diversification strategy has been positive and successful,” he says. “But we cannot be immune from what is happening in the world. If China slows down, yes that will have an impact; if Europe goes into recession that will have an impact too.
“I think this year will continue to be a difficult one, there are challenges.”
Banks, which have historically been wary of lending to SMEs because of their risk profile, are likely to retreat further from the sector despite a brief renewal of interest in 2015, he adds.
“I saw a trend last year [of banks being more willing to lend to SMEs], but with the current economic situation they are becoming more reluctant. [The Khalifa Fund] is not-for-profit, whereas banks are here to make money. I understand their position.”
Al Nowais’ comments come not long after UAE Banks Federation Chairman Abdul Aziz Al Ghurair revealed in November that SMEs defaulted on about $1.4bn worth of loans in 2015. His claim was backed by UAE bank Emirates NBD, which said it had also noticed a rise in the number of SME customers fleeing the country without paying off their debts.
The revelation has not done the sector any favours. UAE Minister of Economy Sultan bin Saeed Al Mansouri was quoted as saying at the time: “In some countries the level of bankruptcies for SMEs is up to 90 percent. We’re nowhere near that level, but it’s our role to minimise [such defaults].”
However, analysts later claimed that SME defaults account for less than 0.5 percent of total outstanding loans in the UAE, while Khalifa Fund chief financial officer Marwan Al Suwaidi told the sixth UAE Conference on SMEs and Innovation last year that there had been “no increase” in loan defaults among the businesses it had sponsored.
In an extraordinary decision last week, UAE banks agreed to suspend legal action against SMEs struggling to repay debt for up to three months to prevent a surge in defaults that could jeopardise the economy.
The initiative, which involves businesses working with lenders to restructure their loans, is intended to give breathing space to SMEs.
Al Ghurair described it as a “mini insolvency law”.
“We will give the customer time and space as long as they’re genuine,” he said announcing the decision on March 29. However, he also called on the government to “expedite” the new insolvency law still in the planning stage.
SMEs certainly remain crucial for the UAE’s economy. According to Al Mansouri, they provide jobs for more than 86 percent of the UAE’s private sector workforce.
In 2014, Khalifa Fund launched a guarantee scheme in partnership with Arab Bank, under which the bank agrees to finance SMEs approved by the fund, up to a maximum of AED5 million ($1.36m). The fund has a similar arrangement in place with Abu Dhabi Commercial Bank and Al Nowais says such initiatives have gone some way towards assuaging banks’ caution over financing SMEs.
He also says tougher economic conditions in 2016 have so far failed to impact the volume of applications the fund is receiving. “It’s almost the same [as last year]. We’ve had almost 2,000 applications in the past 12 months — normally we see between 150 and 200 per month and have seen the same trend this year.”
Al Nowais said the fund has awarded a total of AED1.4 billion ($380m) to Emirati-run start-ups across the country since its inception, supporting about 1,100 projects. Every AED1 the fund lends generates AED4 of revenue for the UAE economy, he claims, citing an impact study commissioned by the Khalifa Fund last year.
More than one third of the applicants are female, and an additional 7,000 budding entrepreneurs are receiving training and support from the fund to develop their ideas, even if they are not yet ready to start a business and pitch for funding.
The fund has two programmes, each with different requirements. The first aims to support ‘economic development’ projects that typically require between AED1 million and AED3 million to contribute to key business sectors such as services, agriculture, retail and industrial. The second is for smaller ‘social development’ projects “where the requirements are less, the process is easier and the amount of funding is smaller”.
For the first category, the Khalifa Fund requires a professional business plan, Al Nowais says: “We need to see cashflow, strategy and proof that the applicant has the capabilities, background and skillset to get the venture off the ground.
“If he doesn’t, he will be matched with one of our business ‘counsellors’ and put through a four-week training programme.
“The applications are a mix of people who have no prior experience of running a business and need a bit of handholding, and others who come with a specific idea and a specific background and can hit the ground running.”
One of Al Nowais’ greatest concerns is a lack of diversity among the start-ups. Certain business sectors are becoming saturated, creating intense competition among SMEs, he says.
“A new objective for [the fund] is to encourage entrepreneurs to move away from the classic, run-of-the-mill kind of business that is over-represented and creating internal competition within the sector.
“A lot of women are coming up with the same business idea, for example a nail bar, spa or traditional Emirati dress shop. If it’s a young man, it will be a coffee shop or a gym or a food business.
“So we are trying to say, ‘come, there is enough of this, you will be competing with thousands of people and you will all fail. Come back with a new idea.’”
He notes that the failure rate of all UAE-based SMEs is between 30-40 percent, and the rate among Khalifa Fund-supported businesses is in line with this. So the organisation is working with private sector businesses and other government institutions to improve success rates.
Last November, it launched a Khalifa technology incubator in partnership with Mubadala and Khalifa University. Al Nowais is a member of the board of trustees. The incubator aims to provide young graduates with a degree in science, technology or maths and a “desire to innovate” with the chance to incubate their ideas at the university, with advice from professionals.
It also runs the Khalifa Fund Gateway mentoring scheme and is working with Takamul, an initiative of government agency Abu Dhabi Technology Development Committee (TDC), which helps entrepreneurs patent their ideas.
Meanwhile, the Khalifa Fund expects later this year to start working with global companies to assist entrepreneurs in commercialising their ideas — for example, once a patent has been secured, Al Nowais reveals.
“Many of these people who are patenting may not know how to turn their ideas into businesses,” he says. “Under this new initiative, we would team up with big multinationals — we are currently in talks with two US and French firms — who would perhaps buy or licence innovative emerging products as part of their corporate social responsibility (CSR) programmes.”
This would have the effect of testing new products in the market and giving entrepreneurs the visibility they need to scale up their businesses.
The Khalifa Fund does not currently offer funding to expats due to historical laws that forbid provision of zero interest loans to non-nationals, however, Al Nowais says he would consider finding a way to do so “if there was clear added value”. For example, a fledgling business with a special edge in a sector such as technology that has been identified as a priority by the UAE government. “It it’s really worth it we could find a way.”
Despite the support on offer, hundreds of fledgling SMEs fail in the UAE each year and Al Nowais is frank about the reasons for this. “My concern is that some SMEs take things for granted,” he says. “They see it like a fait accompli. Some of the applicants we see have heard their friend got a loan and they thought, oh, why don’t I try too?”
The most common mistake SMEs make is to think they know everything. “Young start-ups often don’t listen. They think they know everything. And, by the way, they do know a lot. If I compare myself with my son, if I was the same age as him I would know less than half of what he does.
“Technology means information is more readily to hand — youngsters today can more easily research and do things. But it’s still important to know what you do and don’t know.”
Another potential barrier to successful start-ups is flimsy financial awareness. Young Emiratis, says Al Nowais, “like to live beyond their means and are sometimes a bit spoon-fed”. The most recent Arab Youth Survey from PR consultancy Asda’a Burson Marsteller, published in April 2015, revealed that the majority (81 percent) of respondents from across MENA said they were “concerned” about rising youth unemployment, and nearly two in five (39 percent) said they were looking to start their own business within the next five years, partly to help mitigate concerns over a perceived lack of opportunities.
However, despite the evidently high levels of interest in entrepreneurship among the younger generation, Al Nowais says the extremely well-paid UAE government sector remains the “first choice for young Emiratis” looking for an easy route into reliable employment.
“It’s a secure, guaranteed income, but [young people] need to realise that the government has a limit as to how many people it can employ. Starting a business is another way of creating jobs,” Al Nowais says.
“We’ve had people starting businesses while still employed in the private or public sector. They have then resigned when they became confident the business was going somewhere.
“I don’t mind that, because I can see that these people do not want to be involved in a new venture, lose their present job and then fail in their new business and have no job. So we encourage them to keep hold of their day jobs, work long hours to get the new one off the ground, and see where it goes.”
The most important thing, he adds, is to have passion — “to enjoy what you do so you can excel in it and get good results. Don’t take anything for granted”.
With decades of experience in UAE business, Al Nowais chairs the UAE’s largest industrial conglomerate, Senaat, and is a past chairman of Etihad Rail and former board member of the Abu Dhabi Ports Company, SHUAA Capital and Emirates Industrial Bank, among others.
He has three children — his two sons would like to be entrepreneurs, while his daughter is “totally not interested”.
“But I would encourage them all to try, of course,” Al Nowais says. “Life is about taking risks. I always encourage people to try hard but be prepared [for failure] and if you fail, don’t just cry, try again. The greatest people in the world have failed so there is no harm in failing. But don’t repeat the same mistake!”