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Sun 19 Mar 2017 10:06 AM

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When it comes to Bahrain's SMEs, less is more

Supporting the best ideas to scale up is better than a maze of start-ups.

When it comes to Bahrain's SMEs, less is more
The next step Bahrain’s economy would benefit from helping small businesses expand into medium-sized firms.

With GCC governments placing so much emphasis on start-ups as the backbone of a stronger, non-oil based economy, people would be forgiven for thinking it was all about quantity over quality.

In fact, in an interview two years ago, a senior official at Abu Dhabi government leading on the UAE’s ‘Takamul’ patenting initative, came right out and said it. He told Arabian Business that the quality of patent applications from citizens was not the point – the key was to encourage original thinking, even if the product was unworkable. “There is a higher probability we will get quality ideas if we have more coming in, so we are not filtering for quality,” he said.

That is all very well when you are talking about ideas generation. But what about once those ideas have sparked the formation of a new business? If that business is struggling to take off years later, surely we need to ask some tough questions about why.

In this week’s special issue on Bahrain, the chief economist of the kingdom’s investment agency makes an important point along these lines. He says that efforts made to stimulate entrepreneurship in Bahrain have paid off – SMEs made up 99 percent of Bahrain-registered companies in 2015, according to government statistics. But this teeming mass of small businesses is failing to bring about a proportionate economic impact, as it still accounts for less than a quarter of Bahrain’s GDP.

“Bahrain has a vibrant culture of SMEs but the ecosystem is incomplete,” says Bahrain Economic Development Board’s Jarmo Kotilaine (page 26). “The fact that we have [a growing number of] SMEs does not mean we are getting the full impact from it.”

Too many businesses are operating at a suboptimal scale, he argues; they are either SMEs, such as coffee shop businesses with one or two outlets struggling to secure the resources to scale up, or large corporates. There is very little in between.

The solution is not just about improving the quality of the original idea – although that is part of it. Improving the quality of a business is also about putting in place initiatives and resources to enable it to more quickly and easily expand its operations, reach more customers and go from strength to strength.

For Bahrain in particular, size really does matter because the market is small. Being able to expand overseas, even if it is only to neighbours Qatar and Saudi Arabia, could be a game changer for that business.

Governments and banks need to do more on this front. Most of the GCC states have start-up loan programmes and seed funds in place, yet few have devised initatives to help SMEs deal with the inherent risk in taking that next step: building market share. Qatar Development Bank has launched a debt-to-equity seed fund, giving SMEs access to convertible notes (short-term debt) that convert into shares following a new round of financing.

More initiatives like this would be welcome, as would an objective system for company valuations to encourage mergers and acquisitions. There are likely thousands of small businesses in the Gulf that have served the family week-by-week for decades, but that could, with a bit of encouragement and an ambitious member of the younger generation, team up with a similar-sized business and significantly increase their fortunes.

Maybe the next policy step up from creating a bedrock of SMEs, is to build a smaller number of larger companies – ‘MLEs’, let’s say, or medium-to-large-enterprises – and further drive private sector growth.