Banks must lend more to small businesses

Abu Dhabi: The Ministry of Finance (MoF) has called on UAE banks to increase their level of lending to small and medium-sized enterprises (SMEs) through targeted schemes.

According to the results of a joint survey of Union of Arab Banks and the World Bank on ‘The status of bank lending to SMEs in the Mena region,' the share of bank lending to SMEs is only 8 per cent of their lending in the Mena region.

Oil economies

Reflecting the characteristics of concentrated oil economies that are dominated by large enterprises, appreciated exchange rates and small non-oil sectors, SME lending is only 2 per cent of bank lending in the GCC while in non-GCC countries it stands at 14 per cent. Some GCC banks maintain a level of SME lending at 5 per cent but the maximum is 10 per cent.

These levels are substantially lower than in both the developing and developed countries and are below the banks' own long range lending targets which stand at 12 per cent in the GCC.

The study also revealed that though SME lending is not dependent on the size of a bank, banks with larger branch networks have lent more than others, underlining the importance of relationships in transactions. As many as 87 per cent of GCC banks have SME clients and the same percentage has a separate unit to manage the SME business.

It counters the conventional view by revealing that large banks are as attracted to SME lending as smaller banks and that relationship lending by small banks does not dominate this segment. From the SME point of view, only 20 per cent of SMEs in the Mena region have a direct line of credit or loan and only 10 per cent of their investment expenditures are financed by bank loans.

Profitable

According to Khalid Ali Al Bustani, Executive Director of the International Financial Relations Sector in the Ministry of Finance, "Though GCC banks regard the SMEs segment as potentially profitable, there has not been a concerted effort to encourage lending to them and diversify the financial infrastructure. Lending to large corporations is reaching saturation levels and SME lending can enhance bank returns with higher cross-selling of financial products and decrease their risk profile.

"It is especially important in the UAE where we have increased the size of our non-oil economy year on year."