Banks must accelerate lending to small businesses across the region to help create as many as 6.5 million new jobs needed every year, officials warned yesterday.
Some banks have been working with the International Finance Corporation (IFC), the private-sector investment arm of the World Bank, to redirect more credit to start-ups and smaller businesses, while regulations are in the pipeline to support small and medium enterprises (SMEs).
But officials say such steps need to be expedited.
"We need to support the efforts of those who try to create job opportunities, particularly in light of political events in the Arab world," said Abdullah Al Saleh, the undersecretary of the UAE Ministry of Economy, at the IFC SME Banking Conference in Dubai yesterday.
Considered the lifeblood of most economies, SMEs account for nearly 90 per cent of companies in the UAE and provide about 85 per cent of private-sector employment.
But loans to small businesses in the region make up only 8 per cent of total lending, short of double-digit levels in other developing countries. The shortfall means start-ups and small firms are being starved of capital needed to expand and employ more people.
"Supporting SMEs is a priority that needs to happen as the demographic trend is not going in your direction," said Jean Pierre Lacombe, the chief of global markets and financial engineering at IFC.
The growing youth population means 270 million jobs are needed in the Mena region by 2050, estimates the IFC. To meet the target, 6.5 million jobs need to be created every year until 2050, while the region's GDP has to grow at an average of 7 per cent every year, he said
Slim profit opportunities and an uncertain risk are among the reasons commonly cited by banks for their reluctance to lend to SMEs.
Bernd van Linder, the managing director and chief executive of Saudi Hollandi Bank, pointed out that 85 per cent of start-ups fail in their first year.
But Saudi Arabia's fourth-largest lender is among 11 banks in the Mena region that the IFC is helping grow their SME portfolio.
"For us it's a profitable business," he said. "You have to price according to risk. It's clear pricing will be different to large corporates."
Another bank, Lebanon-based BLC, has targeted an even more neglected corner of the market: female entrepreneurs. Between February this year and the same month last year, it increased lending to businesswomen by 92 per cent, said Maya Younes, head of the marketing group at the bank.
But overall in the region the picture is mixed. The challenge for SMEs has been made worse by a pullback of banks' overall lending since the global financial crisis. Evidence of the sluggish lending conditions in the UAE was highlighted yesterday with the release of data from the Central Bank showing credit growth expanded by 0.7 per cent in April from a month earlier. Lending growth in the country reached 2.6 per cent last year, the slowest pace in the GCC.
Changes are in the pipeline to help encourage banks to loosen their credit lines.
Mr Al Saleh, the UAE official, said a law governing SMEs was due to be discussed "soon" by the Federal Cabinet.
"The law will contribute to financing of SMEs and will encourage citizens to become entrepreneurial and improve their competitiveness through access to research and technology," he said.
The drafting of legislation is in the final stages to establish a registry of machinery and other assets SMEs in the UAE can use to back loans to improve financing options.
Across the region, the Arab Monetary Fund and the IFC are advising countries including Morocco, Yemen and Jordan set up credit bureaux, designed to give banks more information on the creditworthiness of SMEs. The UAE's own credit bureau will begin a pilot programme in July, with a dozen UAE banks participating.