Small businesses in Abu Dhabi will continue to struggle to obtain finance needed to grow and build the economy unless financial markets are further developed, says the emirate's Department of Economic Development (DED). Small and medium-sized enterprises (SMEs) have been hit the hardest by the contraction of credit lines in the wake of the global financial crisis, bankers say, as lenders become increasingly risk-averse.
"SMEs still face challenges," Mohammed Omar Abdullah, the Undersecretary of the DED, told a conference in Abu Dhabi this week. "The access to finance for SMEs is difficult and expensive, and we have to work hard to remove obstacles there." A shortage of credit for SMEs, which are often regarded as the lifeblood of economic growth, may constrict the capital's ambitions to build its non-oil economy, the department said in a new report on attracting strategic private investments and promoting non-oil exports in Abu Dhabi.
Unless access to funding is made easier and cheaper, SMEs could be limited in their ability to build capacity, increase productivity and create jobs. The number of start-ups could also be cut by a lack of funding, while entrepreneurs may be less capable of financing projects, the report said. Developing the banking and financial system under the supervision of regulators such as the Central Bank and Emirates Securities and Commodities Authority (ESCA), while honing monetary policy tools to deepen the debt securities market, were among the measures the Government was focusing on to improve finance availability to the private sector, it said.
The Government established the Khalifa Fund in Abu Dhabi to offer financial and training support to new SMEs set up by Emiratis in the capital. "Without further developing the financial and capital markets and building on the efforts of the Khalifa Fund and other entities, SMEs and the domestic economy stand to be negatively affected," it said. In a bid to further help the sector, the Federal Government in August abolished the minimum capital requirement of Dh150,000 (US$40,800) needed to establish a company. The move appears to have had some success, with a doubling of the number of SME start-ups in Abu Dhabi since August compared to the same period last year.
But corporate lending remains in the doldrums as many banks continue to be occupied with setting aside provisions to protect themselves against bad loans, which many predict have yet to peak. Bankers and analysts expect that lending should start to pick up next year, partly as a result of a recent flurry of corporate bond issuances, allowing lenders to refocus on the SME segment. "The domestic lending market remains tight," said Jeremy Parrish, the chief executive of Standard Chartered Bank in Abu Dhabi and Al Ain. "With banks more conservative about lending money, small names and enterprises are squeezed by a flight to quality, so we are seeing the outcome of that.
"What really needs to happen is for banks to take a clean risk on SMEs and not to take 100 per cent collateral on them." However, to help SMEs over the longer term, the UAE could follow the example of a risk-sharing model developed in Singapore, where the government and banks split the risk of lending, said Mr Parrish. The idea is the government's involvement reduces the risk to banks, giving them more confidence to extend loans.