Insight Government and banks are formulating plans to come to the aid of struggling small and medium-sized enterprises.
The small business of survival
Seaside Sweets has proved a popular shop for decades for Abu Dhabi consumers searching for a sugary delight. Cakes, petit fours and a seemingly endless array of pastries are among the treats that have attracted a steady flow of customers since the business first opened its doors in the capital's tourist club area 35 years ago.
It employs 33 people and is the model of a typical small business. But that stream of eager shoppers has slowed to a trickle since the financial crisis began to impact the economy of the Emirates, pushing consumer spending down. "My sales have been down by 40 per cent," says Baheej al Saabi, the Lebanese owner whose father established the shop. "My overheads are high and my costs are still the same, if not more. I am uncertain about anything until January. My aim is to at least maintain or survive in the market."
Accounting for about 85 per cent of employment in the UAE and contributing 46 per cent of its Dh535.6 billion (US$145.81bn) GDP, small and medium-sized enterprises (SMEs) are regarded as the lifeblood of the economy. Mr al Saabi's experience mirrors that of thousands of small firms struggling to stay in business amid falling revenues, while contending with the unrelenting cost of rent, electricity and water.
To make matters worse, traditional avenues to credit have been blocked as risk-averse banks tighten lending requirements for smaller companies. Seaside Sweets fits within the Government's classification of a small business as a company that employs fewer than 50 people. It defines a medium business as employing between 50 and 100 staff. Prior to the economic crisis, the buoyant health of the economy was reflected by the SME sector, which enjoyed sufficient revenues and credit to build capacity, raise productivity and create jobs.
The outlook for SMEs became more difficult once the slowdown began at the end of last year, damaging consumer and investor demand and hurting businesses within industries particularly exposed to the downturn, such as construction and trade. The Government has taken notice. It is starting to address the plight of smaller businesses amid growing concern that a sustainable recovery in the wider economy may not happen unless the grass roots are reinvigorated.
"The issue at the moment is that banks don't think the benefits [of lending] outweigh the risk, as the risk within the SME sector is large," says Raj Madha, a senior research analyst at EFG-Hermes. "The first risk is uncertainty about collection of debt and weaker demand, both from consumers and investors. Once we have a visible economic recovery, banks will lend again." Many banks are already weighed down with debt from non-performing loans, which many in the industry say have yet to peak. Corporate lending remains sluggish as lenders focus on rebalancing their loan-to-deposit ratios while setting aside funds to protect themselves against future bad loans. A significant portion of current lending is going to larger corporations, which are considered less of a credit risk.
The loan book at Commercial Bank of Dubai, traditionally one of the major lenders to SMEs in Dubai, has remained unchanged since the third quarter of last year, says Mr Madha. He believes that if and when adequate funding is provided for cash-strapped government-owned companies, this will in turn release cash through the value chain to smaller firms. Still, momentum is building in both the public and private sectors to help small business owners. In the former, the Khalifa Fund to Support and Develop Small and Medium Enterprises is close to finalising a deal with private lenders to help businesses tap credit markets.
The arrangement is expected to involve the state-backed lender absorbing about 90 per cent of the risk, with banks covering the remaining 10 per cent. The idea is that government involvement will help reduce the risk to banks, giving them more confidence to extend loans. "We are currently working with banks to see how we can expand lending sources by giving them guarantees," says Dr Ahmed Khalil al Mutawa, the executive director of the Khalifa Fund. The Government established the fund to offer financial and training support to new SMEs set up by Emiratis in the capital.
A continuing shortage of credit to SMEs could constrict the capital's ambitions to build its non-oil economy, the Abu Dhabi Department of Economic Development warned earlier this month. It urged a focus on developing the banking and financial system under the supervision of regulators such as the Central Bank and the Emirates Securities and Commodities Authority, while honing monetary policy tools to expand the debt securities market.
In the private sector, signs are emerging that banks are starting to take a more relaxed view on lending to smaller enterprises. HSBC Bank is close to launching a $100m fund to support small firms involved in international business, says Simon Cooper, the deputy chairman and chief executive of HSBC Bank Middle East. Other banks are pitching in as well. Jamal Alvi, the UAE head of SME banking at Standard Chartered Bank, says the lender has become more aggressive in providing loans to firms within industries performing well as the recovery takes hold, such as food, property management and oil and gas.
Its credit picture is not completely rosy, however. Standard Chartered, which has a market share of about 10 per cent in the Emirates' SME sector, tightened lending requirements during the crisis for companies within "high-risk" sectors such as upstream construction. Firms within those industries had to have financial records dating back five years rather than the previous limit of three years, says Mr Alvi.
The lending picture is also complicated by a lack of reliable information on SMEs. There is a need for a central database logging financial statements of small businesses to improve the lending environment and help banks better assess the financial health of companies to which it lends, says Mr Alvi. "The regulatory structure on tracking collateral is non-existent," he says. "As there's no tax, companies don't have to file financial statements to any regulatory body, so there's no database on how companies are performing in the economy."
An increasing focus is also needed on assisting start-up businesses, which are often unable to obtain finance as banks generally require them to have a financial track record of at least three years, he says. The public sector is helping matters in that regard. The Government has abolished the minimum capital requirement of Dh150,000 needed to establish a company. The move appears to have been successful, with a doubling of the number of SME start-ups in Abu Dhabi since August this year compared with the same period of last year.
The Mohammed Bin Rashid Establishment For SME Development (MBRESD) plans to expand its existing scheme, which offers financial assistance to Emiratis launching small businesses, to also cover expatriates from the first quarter of next year. MBRESD assists start-ups in developing innovative business plans through mentoring, government aid, networking and financing assistance. More than 800 Emiratis have had their businesses supported by the organisation since it was established in 2002.
In future, smaller start-ups may have to consider accessing less conventional forms of finance than traditional debt financing such as venture capital funding, says Robert McKinnon, the head of research at Al Mal Capital, an investment bank in Dubai. "Business owners generally have to give up a bigger slice of the pie in a private equity arrangement, so that's why they prefer bank lending - in future it may not be so easily available because of their risk profile," he says.
"For a private equity investor, the reward is there on future returns and that matches the risk." But for struggling existing small firm owners like Mr al Saabi, at the moment all they can do is hope that an improvement in the economy will lead to a return of much-needed business. @Email:email@example.com firstname.lastname@example.org