Loans dry up for small businesses

Dubai: Many of the UAE's small businesses, considered to be the backbone of the economy, are facing acute shortage of financing from banks, a study says.

Credit conditions have become difficult over the last few months, as events in the financial world have stirred credit markets across the globe.

Small and medium-scale enterprises (SMEs), which constitute more than 85 per cent of businesses in the UAE, have also been struggling to obtain credit.

According to a report released by global consultants Dun & Bradstreet (D&B), more than 50 per cent of SMEs in the UAE are having problems accessing credit. SMEs also face high interest rates for unsecured lending (around 15 per cent), which are much higher than what is prevalent in the Western markets.

The D&B "Industry Perspectives: UAE SME Lending" report, which was based on a survey on key industry leaders from August to October 2008, however clarified that SMEs' problems on credit access are not simply on account of the recent liquidity crunch.

The study showed that banks in the UAE generally reject between 50 per cent and 70 per cent of the applications for credit to SMEs, largely due to high perceived risk of lending in the country, as well as applicants' failure to meet tight loan requirements and conditions.

"The main reasons for banks' reluctance in lending to SMEs in the UAE include lack of organised financial statements, which is the best indicator of past performance and track record and lack of transparency and business (financial) discipline among SMEs, leading to uncertainty among banks regarding SME repayment ability," said Karthik Ganesan, D&B consultant for research and advisory services.

Ganesan also noted that the majority of businesses are trade and retail by nature with limited assets. "Banks have difficulty in assessing the future potential and cash flows of such businesses and hence, rely on collateral," Ganesan told Gulf News.

Dubai has the greatest number of small businesses, which constitute 45 per cent of the SMEs in the UAE. About 32 per cent of SMEs are in Abu Dhabi, while 16 per cent are in Sharjah and 7 per cent are in other emirates.

D&B's study showed that 55 per cent of SMEs were unable to get the credit they required and more than 50 per cent of SMEs surveyed were unhappy with the interest rates.

About 25 per cent of small businesses have used a secured loan and only 13 per cent have used an unsecured loan. The majority of them (55 per cent) have used a letter of credit facility and also a significant number (45 per cent) have used an overdraft.

The scope of D&B's study was primarily the commercial finance situation in the UAE. The government and other organisations, like the Mohammad Bin Rashid Establishment for Young Business Leaders, also play a role in the SME finance market.

SMEs are considered a critical component of the value chains in the economy.

In fact, a vast majority of contractors and building material suppliers in the UAE are SMEs, hence lack of working capital could result in supply disruptions in the real estate value chain, according to Ganesan.