UAE Central Bank looks to private equity to plug SME funding gap
Bank lending to small businesses drops amid lower economic growth
The governor of the Central Bank of the UAE wants private equity firms to help fill the void left by banks that have cut lending to SMEs in recent years amid lacklustre economic growth.
“The exposure of our financial sector to SMEs is moderate and I think this could be improved tremendously provided that all stakeholders play their role,” Mubarak Rashed Al Mansoori, governor of the Central Bank, told delegates at the Middle East Banking Forum in Abu Dhabi on Wednesday.
“We have to make sure the other stakeholders play their role ... The investor community needs to be developed further and we need to open it to the private equity sector that they come to this vital important sector for our economy.”
UAE banks have reduced lending to the country's SME sector in recent years amid a slowdown in economic growth following a collapse in oil prices.
“Banks have taken a look at SME lending with good intention but banks’ experience in the past has been not good with SMEs,” Abdulaziz Al Ghurair, the chief executive officer of Mashreq Bank and head of the UAE Banks Federation, told The National on the sidelines of the banking forum.
“Our loss ratio has been 20 per cent. Therefore banks are looking at their lending policy. We will continue to lend to SMEs, under new conditions. Before it was more of unsecured lending, totally unsecured, now if you want to have some long term lending you will have to put up collateral.”
Noor Bank chief executive John Iossifidis told Reuters this week his bank would move away from unsecured lending to SMEs, after a rise in bad debts within the sector.
“We are not turning our back on that sector, but it’s certainly not going to be the unfettered lending that was happening two years ago in the banking sector," he said.
Mr Al Mansouri said that the Central Bank was working on regulations that would help small businesses access financing, especially at rates that give them an opportunity to be profitable. Mr Al Mansoori said the Bank has been engaged with the UAE Banks Federation to define rules and operating procedures for banks when it comes to dealing with SMEs, especially with the view to giving nascent companies more attractive rates of financing.
The Central Bank is also looking at new regulations that would allow small companies to tap alternative forms of financing such as crowd funding that would give them better rates for borrowing money, he said.
Mr Al Mansoori said that banks typically would charge 15 per cent interest on unsecured loans to SMEs, with secured loans charging around 6 to 7 per cent.
“If an SME is being charged 15 per cent, I don’t know what kind of margin they are making. It’s always difficult for them to make money and easy to go into default.”
The Arab Monetary Fund said in April there is a 300 per cent funding gap for SMEs in the region that banks are not filling. The Abu Dhabi-based fund said that while SMEs make up 80 per cent of businesses in the region, only one in five has a loan or line of credit.
SMEs make up 90 per cent of registered companies in the UAE. Authorities have been banking on small businesses to bolster economic growth in the country, at a time when the hydrocarbon industry remains in the doldrums because of lower oil prices.
But smaller companies have also been hit hard by the economic slowdown, with cancelled contracts and late invoice payments taking their toll. Many small business owners absconded from the country in 2015, leaving an estimated Dh5 billion in unpaid debts.
Updated: November 23, 2017 07:51 AM