Qatar building big businesses from small ideas

An engineer by background, Abdulaziz Bin Nasser Al Khalifa, CEO of Qatar Development Bank (QDB), has a degree in electrical engineering from the University of California in Los Angeles (UCLA) and diplomas from Harvard and other US and Middle Eastern universities.

Since taking the reins at QDB — Qatar’s principal state lender for small-and-medium-sized enterprises (SMEs) — in 2014, the Qatari national has commandeered an overhaul of the bank’s support for the country’s burgeoning community of entrepreneurs, drawing on his prior experience as CEO of Enterprise Qatar, a government-backed organisation that provides training and mentoring to SMEs.

QDB provides a combination of financing and business support services to entrepreneurs. Among the initiatives Al Khalifa has spearheaded are the launch of Al Dhameen, which provides 85 percent partial guarantees for SME loans from partner banks; Tasdeer, QDB’s export development agency to encourage the international sale of goods and products from Qatar, and the Housing Loan programme for Qatari citizens.

Arabian Business revealed at the end of last year that QDB was preparing to launch a debt-to-equity seed funding initiative for entrepreneurs — the first of its kind in Qatar. The fund was launched in January and gives SMEs access to convertible notes with a ticket size of up to QR1m ($274,000) each.

A convertible note is a short-term debt that converts into equity. In the context of seed financing, the debt typically converts automatically into shares following a first round of financing. The initiative is intended to fill a need for fresh seed capital in the Gulf state, and encourage entrepreneurs to start their projects with a lower assessment of overall risk.

The Qatari government is assessing how it can promote entrepreneurship and create employment opportunities for the national workforce.

Qatar is expected to be among the best performing economies in the GCC this year, with the International Monetary Fund (IMF) forecasting real GDP growth to rise from around 2.7 percent in 2016 to 3.4 percent in 2017. GDP growth across the rest of the GCC is forecast to average around 2 percent with the UAE and Qatar the top performers and Bahrain, Oman and Saudi Arabia facing the steepest economic challenges.

State-run Qatar National Bank (QNB) noted last year that Qatar’s economy had weathered the impact of low oil prices and would likely bounce back this year with anticipated modest recovery in the hydrocarbons sector and an uptick in business activity in the run-up the Qatar 2022 World Cup.

However, the country is not taking anything for granted — oil revenues still account for more than 70 percent of government revenues, and it is working to grow the private sector and diversify the economy to cushion any further blow. Supporting SMEs is a key plank of this strategy.

“As you know, we are blessed in Qatar with our natural resources,” Al Khalifa says in an interview with Arabian Business in Doha. “But we also have a very wise leadership that has invested the revenues from these natural resources into, first, people, and, second, proper infrastructure to support businesses and the economy in general.

“Within our national Vision 2030 there is a pillar about economic diversification and at the heart of this is growth of SMEs, which play a vital role in creating a knowledge-based economy.

“Are they the only tool for diversifying the economy? No. But are they a good tool for Qatar to use to stimulate growth within the private sector ecosystem? Yes, and this is what we are doing.”

QDB aims to assist aspiring entrepreneurs with the tools and knowledge they need by connecting with relevant organisations, according to Al Khalifa.

Al Khalifa says the country is seeing a rise in interest among Qataris in starting their own businesses. “More and more young Qataris are starting their own entrepreneurial projects and becoming self-sustainable to the point where they are entering new markets, using Qatar as a base from which to launch international operations.

“We are also seeing, notably, a rise in joint ventures between local and international companies where there is a transfer of know-how and Qatar is used as a hub for foreign firms to enter regional markets.”

QDB has recorded rising demand for loans over the past year, Al Khalifa reveals. Loan provision to SMEs totalled $374.6m at the end of 2015, while the 2016 figure as of October (the most recent figures available) already stood at $346m, meaning QDB was on track to record 20 percent year-on-year growth in loan provision by the end of 2016, the CEO claims.

The bank’s total assets as of December 31 stood at $2.3bn — up from $2.05bn the previous year — and net profit for the year was $7.46m up from $5.66m at the end of 2015, according to its 2016 financial statement.

Last year, QDB launched a dedicated SME Equity Fund, worth QR365m in total and making ticket sizes of between QR1.5m-QR7m ($411,940-$1.92m) and QR3.5m-QR18m ($961,195-$4.94m) available for small enterprises and medium-sized growth businesses, respectively. Al Khalifa says around 5 percent of the five-year fund has been released to date.

However, he warns that access to finance remains one of the largest barriers to SME growth in the region, particularly in economically uncertain times when banks are cautious of lending. “No matter what we do, and with all the services we provide, it is still difficult for SMEs to obtain access to funding — and that’s from funding ratios.

Developing small and medium-sized businesses is at the centre of Qatar’s National Vision 2030 plan.

“Take a look at all the funding that’s happening in the region and then look at the percentage that’s going to SMEs and it barely exceeds 5 percent, which is a very small number.

“The lack of a proper venture capital (VC) ecosystem creates a vacuum within which entrepreneurs have difficulty in financing their projects. There aren’t that many VC funds available here.”

Hence, QDB’s foray into the debt-to-equity space this year, and other lending initiatives.

“We don’t only lend – we do much more than this. When we started back in 1997 our paid-up capital was QR200m ($55m). Now the bank has evolved in so many ways and currently our capital is around QR12bn ($3.29bn),” Khalifa says.

“We’re trying to address the funding gap through a range of mechanisms, whether it be by direct lending — where our portfolio has exceeded QR6bn ($1.64bn); indirect lending, where our guarantees have exceeded QR1bn ($274m), and our partial guarantees, export finance and lending assurance schemes have exceeded QR600m ($164.7m), or through equity, with the QR365m ($100.2m) seed fund we launched recently.”

All in all, more than 1,500 SMEs in Qatar have received “some sort of financial support” from QDB and around 5,000 have received solely non-financial aid, meaning the bank has helped around 7,500 SMEs  — “a good number”, Al Khalifa says.

Bedaya Centre provides mentoring programmes to Qatari youth to help them launch their business.

Aside from access to funding, Qatari SMEs face four main challenges, he adds. The first is obtaining access to “proper” information and training that allows them to survive and flourish in a competitive market. QDB seeks to address this issue by working with local agencies to provide assistance with feasibility studies, business plans and leadership training.

For example, Qatar Business Incubation Centre (QBIC) and the Bedaya Centre for Entrepreneurship and Career Development — both of which Al Khalifa is chairman — offer practical guidance and mentorship to grow the skills of would-be entrepreneurs. QDB also provides market data, producing quarterly, sector-specific, diagnostic reports to inform SMEs’ feasibility studies, Al Khalifa says.

The second challenge is access to local and international markets. “Local markets are typically driven by the big companies that have been here a while,” he says. “They know the major clients and those clients are usually hesitant to deal with SMEs due to the risk they would have to take on.

“It would also be difficult for SMEs to broker ties with international clients because it requires a lot of funding and research — and cracking international markets is not an easy thing to do, even for larger companies,” he adds.

Al Khalifa says QDB organises networking events to connect to Qatari SMEs with local and international businesses and help them enter global supply chains. Its Moushtarayat local procurement conference is in its second year now and will take place in April at Doha Exhibition and Convention Centre (DECC).

QDB’s initiatives are helping to stimulate the business culture in Qatar.

Meanwhile, QDB has lobbied the procurement committees of various government agencies in Qatar to exempt SMEs from various requirements most organisations need to fulfil to enter the supply chain, including bid bonds, performance bonds and advance payment guarantees.

“This has provided SMEs with tremendous support and so far we have identified more than QR3bn ($823.88m) of procurement opportunities for them,” Al Khalifa says.

Agreements have been signed with four private sector entities (both local and global) operating in Qatar, one of which is energy giant Shell — where Al Khalifa worked for three years as a business development manager prior to joining QDB. Under the agreement, Shell Qatar has a target for awarding a minimum value of contracts (the figure is not in the public domain, says Al Khalifa) to SMEs, “helping the local service provider get a name like Shell on their client list and helping Shell get a good contract, normally with good margins”.

QDB’s Tasdeer export development agency, meanwhile, helps Qatari SMEs to gain access to international markets through the provision of market data and other intelligence and events to connect them with international buyers.

The fourth challenge facing SMEs is the business environment — the cost and logistics of setting up in Qatar (“the cost of rent, and all of those things that sometimes makes SMEs’ lives hard,” Al Khalifa says) — and the fifth is legal and regulatory barriers, including the lack of a proper commercial disputes system for small businesses, flimsy exit strategies available for investors, and the lack of any robust insolvency legislation.

The UAE government ratified its new insolvency law at the end of last year, bringing more protection to SMEs and other businesses, and it is understood that Qatar’s government is in the process of drafting similar legislation. Al Khalifa will not be drawn on the details of this, but says he has been working with government ministries leading on the plans. He has previously served as a member of Qatar’s Supreme Council for Economic Affairs and Investment and has good ties with government, which strengthens QDB’s lobbying efforts on behalf of the country’s SMEs.

QDB’s SME Excellence List is designed to encourage, as well as reward, local SMEs that created sustainable business models.

It is a hard slog, Al Khalifa admits, adding that all of these five challenges could be addressed faster if there was a fundamental shift in cultural attitude towards the inherent risk of failure entrepreneurship presents. “If there was an entrepreneurial culture that could accept failure, and welcome people out of failure and encourage them to create new ventures and try again, things could be easier, and this is what we are working towards.”

Al Khalifa says he believes Qatar is a “unique case” — although he later concedes the following could apply to any GCC country. “We are blessed with massive natural resources and it simply isn’t a necessity for people to become entrepreneurs.

“Entrepreneurship usually stems out of either passion or necessity; thankfully, we do see a lot of passion among our entrepreneurs here, which is a good thing.”

Despite the anticipated modest recovery in oil prices this year, Al Khalifa is under no illusion that the next six months will continue to be tough for Qatar’s SMEs but he is hopeful that the financing and other support systems being built by QDB and its partner agencies will strengthen over time.

“There is no hiding that the drop in oil prices is causing tension all round. However, Qatar is committed to the diversification projects it has announced to ensure reasonable growth [of the non-oil economy]. Today, doors are being opened for SMEs here, and the private sector in general.”