Much has been written about the limited sources of finance for SMEs. Basically, except for banks and some finance companies, there are no meaningful sources of debt capital in the UAE.
The SME sector is still severely under-banked in the appropriate manner; structured working capital facilities are still in short supply. And there was no shortage, until now, of unsecured, simple business loans given away freely.
As far equity capital is concerned, the options are even more dismal, with no organised market, however small, in existence. The lack has been a deterrent to growth as well as the cause of malpractices by many entrepreneurs who have used debt as equity capital. Businessmen will be businessmen — they will not stop merely because an equity capital market does not exist … The above present opportunities for banks. When the current brouhaha over businessmen in the SME doing skips space dies down — and it will — the thinking caps will be back on how to make budgets. A passing word on this storm-in-a-teacup.
Admittedly, the provision banks will collectively have to make in 2015 appear large as an absolute number. But seen holistically and over a five-year period from 2011 when banks made a lot, it is not so bad a picture.
As far as debt supply to SMEs is concerned, there are still numerous opportunities for banks … with some caveats attached. These pertain to innovation and risk taking — and I don’t mean the risk of the credit kind.
The providers of debt capital are likely to remain banks and finance companies. Online lending platforms, SME funds, etc, are of course appearing on the scene, but in my view unlikely to make any significant impact for a variety of reasons.
The first opportunity for banks is to work on new debt products and refine old ones. No new instruments have appeared on the market for a long while and there is still scope to introduce basic services like factoring (especially non-recourse, off balance sheet structures), insurance wrapped debt instruments and possibly even securitisation of portfolios to release capital and mitigate risk.
Even structured supply chain structures or stock lending (via managed warehouses, etc) have a long way to go. Banks seriously need to think of investing in product development and asking the market what they want. I could be wrong, but I do not know of any bank that has done market research based on extensive surveys on industry needs in terms of credit as well as products/services.
The second opportunity is to develop corporate finance products for SMEs, like private debt placements (SME short term debt with investors/depositors). This will be met with the usual barrage of complaints — of the lack of bankruptcy laws, a credit bureau, ratings system and so on.
This is all a given and banks need to seriously look at how can they influence and shape the market and not react to it. Collaboration is not known here. Here are a few thoughts for collaboration: establish a commonly owned ratings company so corporate debt can be rated; introduce consortium lending or information sharing protocol; develop an intra-bank market for debt paper issued for SMEs.
A small start can be made. There are issues — reluctance of SMEs to divulge information to the public etc. But has anyone made a real effort? Have any surveys of owners and/or banks been done to study the market? Perhaps, and then again, somehow I doubt it.
The third opportunity is to look inward and, for example, to radically rework the underwriting process to include tightening credit facility structures. The tighter the structure, the wider the net that can be cast. (Sounds counter-intuitive, and it is …) Reduce the turnaround times for sanctioning new facilities and/or increasing extant ones. A 25 per cent reduction in ‘TATs’ (turnaround times) across a portfolio adds significantly to revenues.
Significantly increase due diligence to reduce potential losses — this requires very focused and labour-intensive work and banks increasingly turn to specialised companies such as ours, to conduct the same.
Examine more aggressively how risk can be distributed, with risk participation or insurance wraps. All the above will enable serious SME lenders to grow their business further.
The supply of equity capital calls for braver action. The PE market in the UAE is comatose, never having ever been really in a waking state. The world of equity is marked by shortcomings rather than offerings: there is no organised M&A activity for small deals, no SME funds in the mezzanine debt and/or equity capital business to speak of; and no platform (other than a couple) for investees and investors to come together and so on.
This space largely refers to the one where small deals are done, say between $3 million and $15 million, which fail to interest investment banks, even regional ones. True enough, the usual arguments not to do this apply: small deal size, a shallow stock market, lack of exit options for equity investors and so on.
It is worth asking — have banks not ventured into this because of these barriers, or, have they not bothered with this because lending and loan growth was the easier and quicker option? I reckon the latter weighs in heavily.
It is clear that there is an opportunity for a SME focused investment bank. What better place to start than in a universal bank which has investee and investor pools as clients?
Opportunities await. Those banks willing to tolerate some short-term pain and invest in and explore new areas will win in the long run. After all, banks’ offerings are largely undifferentiated.
This does not matter much in a large, growing, under-banked market, for e.g., like in India where a 100 banks can do the same thing and make money. Will it work in a small market like the UAE? Time will tell …. but time waits for no one.
The writer is the Managing Director of Vianta Advisors.