Enough has been stated by various entities on the enormous importance of SMEs in the economy. There is no dearth of recognition of this fact. It is well-recognised that SMEs lead in innovation and employment generation, thereby adding to the dynamism, growth and depth of economies.
There still is an enormous need for affirmative action to be taken to assist them to flourish and grow. Government institutions need to seriously address the needs the sector faces. Policy initiatives need to cover SMEs across the board — across key sectors and by ownership as well (i.e., whether they are Emirati or expatriate owned businesses).
Given the UAE Government’s strategic objective and enormous success in diversifying the economy away from oil dependence, dedicated efforts are needed to drive the SMR sector in a host of areas. Perhaps even a separate Ministry of SME is required.
It has also been recognised that the sector will only grow if the right environment is created — across infrastructure, knowledge, ease of doing business, costs and finance. Advancement, however meaningful, in a few will still not catalyse growth significantly.
It is also well recognised that access to finance is perhaps one of the most critical drivers.
Access to finance alone is not enough. It has to be available at the right time (from start-up stage); it has to be reasonably priced (not the case in the UAE), available in the right form (not fully collateralised with tangible security) and available quickly (also not the case in the UAE).
Given the fact that there are only two sources of finance here — bank finance and equity, my focus is on bank finance, since the avenues for raising equity are very poor. Many countries have interventionist policies when it comes to the SME sector as they realised a long time ago that leaving SME development purely to market forces will not significantly enhance growth.
While there have been initiatives, these have been aimed more at Emirati-owned businesses. the scope of coverage needs to be broadened to all SMEs irrespective of ownership, to make a meaningful impact on the economy. Whereas the Ministry of Economy is studying this issue, there are numerous steps other institutions, like the Central Bank, can take to positively impact this segment.
Here are some more reasons why this is the need of the hour.
•Firstly, despite the fact that there are over 50 banks in the country, I am hard pressed to name more than 10 banks that have a meaningful presence in the SME lending space.
•Second, there are very few that have a long-term strategy for SME lending — many are opportunistic and drift in and out of the space given overall market conditions. This often erratic and certainly short term “trading” mentality causes havoc as does any form of unpredictability.
• Third, is the woeful herd mentality of banks, which tend to rush in and out of market segments at the same time. (Witness the current flavour of the month — property/warehouse/mortgage financing with a “de-focus” on traders. The latter boggles the mind, considering Dubai is one of the world’s leading trade centers.)
• Fourth is the usurious cost of credit. The spreads charged by banks for loans to SMEs is shocking and not justified by cost of credit if taken over five-year cycles — the consideration of which the trading mentality of banks precludes.
In all fairness, these conditions are not peculiar to the UAE, but that of course does not justify their presence. Central banks, the world over, support the SME sector largely through strengthening the flow of finance using various tools and policies aimed at banks.
This issue is complex and needs to be carefully studied, as it is not about forcing banks to lend to SMEs, but by creating an environment that makes it easy for banks to improve their lending.
In emerging markets, central banks have focused on areas such as: strengthening lending infrastructure, ensuring information availability, reducing the cost of capital set aside for SME lending and so on.
Some common tactical measures are as follows; imposition of obligatory SME loan portfolio share requirements; lowering risk weightage on SME loans; enabling consultancy facilities to assist SMEs in applying for loans; providing credit guarantees and so on.
This column is not meant to make tactical suggestions but about pointing out that due to the nature of the market and the “short-termism” approach of banks. An aggressive Central Bank led initiative on improving the flow of finance to the SME space is required.
A pure market driven and laissez-faire approach in this area will not bring about any fundamental change in easing the flow of funding. Without this, the SME sector will never really make quantum leaps, which is the need of the hour.
The writer heads Vianta Advisors.