STOCK SME / ecommerce / online / small business
In Saudi Arabia, STC Pay has worked wonders to expand banking and other services across great swathes of the SME base. The model can be repeated elsewhere. Image Credit: Shutterstock

The importance of SMEs to GCC economies is hard to overstate. A longstanding backbone of growth, they are a vital source of innovation, ingenuity, and entrepreneurship – qualities synonymous with the region itself.

Yet, despite the sector’s prominence, the GCC is also home to SMEs that operate on the periphery of economic life. Admittedly, the Gulf’s shadow economy is small, accounting for just 18 per cent of GDP compared to 28 per cent globally, but in the quest to build the nations of the future, every business counts. The challenge now is to draw informal activity into the light – and the task begins with inclusion.

The premise is simple: bolstering financial and economic inclusion in turn bolsters long-term economic prospects and creates more equitable and stable societies. For the GCC, the premise is compelling, and the reasons for embracing it are manifold.

The benefits

First and foremost, by enlarging the scope and transparency of activities within the formal economy, GCC countries will benefit from additional sources of income. The region can also stimulate economic progress and increase domestic demand by expanding financial services for underbanked and unbanked populations.

What’s more, inclusion can help reduce dependence on informal financial systems leading to greater stability in the financial sector and stronger and more sustainable growth for SMEs themselves.

Financial and economic inclusion can yield social and sustainability gains too. By increasing the availability of financial services, the GCC can further sustainable development goals while empowering low-income and marginalized populations to participate fully in the economy. Here, Saudi Arabia’s STC Pay is making an impact.

By providing a range of financial services through a digital platform, STC Pay aims to increase financial inclusion and reduce reliance on cash transactions. Initially focused on blue-collar workers, the wallet now counts 8.5 million users and has received a license from Saudi Central Bank to become a digital bank.

The motive

The case of STC Pay offers just an indication of GCC’s commitment to inclusion. Indeed, nurturing the small and medium-sized business community is a priority for government leaders—and with good reason. Shadow activity is estimated at 15 per cent of GDP in Saudi Arabia, 17 per cent in Bahrain, 22 per cent in Kuwait, and 24 per cent in the UAE and Oman. While small compared to global averages, these ratios represent sizeable impact in a region where SMEs are a key driver of economic growth.

In the UAE alone, SMEs employed more than 86 per cent of the private sector labor force as of mid-2020 and accounted for over 60 per cent of GDP. Meanwhile, Saudi Arabia aims for SMEs to contribute 35 per cent by 2030, and Bahrain set a target of 50 per cent to be achieved by the same year.

The measures

With ambitious targets to reach, the GCC is spearheading the MENA region’s fight against the informal economy through a comprehensive set of measures:

  1. Streamlining regulations. Simplifying business registration procedures and reducing regulatory burdens will attract shadow actors to the formal economy.
  2. Improving tax oversight. Increasing tax enforcement and reducing tax evasion can incentivize shadow actors to enter the formal economy.
  3. Providing financial services. Improving access to financial services may encourage shadow actors to take advantage of the benefits that come with being part of the formal sector.
  4. Offering access to credit: Enabling SMEs to obtain credit is vital to improving financial inclusion and can be achieved through digital financial services, credit reporting, microfinance institutions, financial literacy, alternative finance, and public-private-sector collaboration.
  5. Creating a level playing field. Ensuring that assistance and resources are distributed fairly and holding all businesses to the same standards can motivate shadow actors to leave the informal sector.
  6. Offering incentives. Government incentives, such as tax breaks or subsidies, may encourage shadow actors to enter the formal economy.

Success hinges on the existence of a robust enabling ecosystem. Among its many component parts, such an ecosystem necessitates a clear and robust legal framework, a simple and transparent tax system, and well-developed infrastructure encompassing transportation, energy, and communications. AI and digital solutions are critical too, alongside market access and much-needed investment for SMEs.

The task at hand is great, but with the right enablers and an ecosystem that fosters growth, the GCC can succeed in its mission to shrink the shadow economy and embrace the hidden potential of one of the region’s most vital sectors.