By Rick Pudner
New disruptors will emerge in 2016, although the oil price will affect regional liquidity.
Last year was an exciting period for the UAE, as focus shifted to innovation in the economy and supporting the entrepreneurs who make it happen. Dubai has always been a regional centre for innovation and a hub for start-ups, particularly in the technology sector.
New initiatives such as the AED2bn ($545m) innovation fund launched by Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, only underscore the drive to make it easier for entrepreneurs to capitalise on their ideas and cultivate an innovation economy.
The initiative builds on the positive impact of Abu Dhabi’s Khalifa Fund for Enterprise Development, which has been instrumental in encouraging UAE nationals to enter the private sector and start businesses rather than focus on government employment. More start-ups in the private sector will create more employment opportunities throughout the economy, in a virtuous circle underpinned
In turn, a robust and diverse ecosystem must be in place to fully support the growth of SMEs. This requires a more active role from venture capital investors, as well as funding programs targeting start-ups.
Traditional financial institutions like banks sometimes struggle to distinguish between knowledge-based and traditional SME requirements. Their risk models require asset collateral, rather than intellectual property, significantly reducing the level of funding that they can provide to this
This has created significant opportunity for the entry of peer-to-peer (P2P) finance companies into the market. Beehive, which is based on crowdfunding technology that connects SMEs and investors, is one example. Thanks to our comprehensive risk analysis processes, Beehive is able to quickly provide knowledge-based SMEs with access to lower cost, unsecured finance. In 2015, we channelled $6.8m to 50 SMEs, and in 2016 we expect to see many more SME business owners turn to the platform as a financier of first resort.
We expect banks to ramp up their digital abilities to compete, prompting the two industries to engage in partnerships and collaborations. We are witnessing this in Western markets already, with progressive banks such as Santander and RBS referring their customers to online P2P lenders.
The price of oil has had a considerable impact on the UAE’s economy over the past year, and 2016 will likely be no different. Over the next 12 months we can expect oil to hover at around $45-50 per barrel and perhaps higher, but it is unlikely to reach as high as it did in the past. This will prove the central challenge for both the public and private sectors, resulting in tightening government budgets and corporate cutbacks.
The oil-exporting countries of the GCC – Saudi Arabia, Qatar and the UAE in particular - will deplete their reserves in the process. But the UAE is particularly prepared to address the challenge, thanks to its diversified economy. Governments will continue to turn to banks to help plug these deficits. With advance deposit ratios at 103 percent, financial institutions could be limited in their ability to lend money, which could have an effect on the SME supply chain, as well as the private sector.
Tightened budgets have already pressured regional liquidity, causing concern about bank defaults, with the UAE Banks Federation Chairman recently estimating unpaid SME debt in 2015 at $1.36bn. However, this figure becomes less significant when compared to the $3.8bn of total debt in the UAE. Banks here are well capitalised and so loan defaults will not have as significant an impact.
In the year ahead, the UAE can expect to see a number of SME success stories enter the market in the form of disruptive businesses similar to Beehive, Fetchr and Careem. Disruption happens any time a company seizes the opportunity to disrupt a value chain that has been in place for a long time, creating a beneficial market for both consumers and providers.
As a young market, the UAE government will continue to adapt to the growth of these new industries and develop supportive legislation. As an SME that recently entered the market and is shaping a new industry, we welcome continued cooperation within the UAE ecosystem to further develop the industry and supportive regulation.
Rick Pudner, Chairman of Beehive Group.