The UAE banks’ SME exposure insignificant when compared to their total loans of Dh1.4 trillion Image Credit: Corbis
The current level of loan defaults by owners of small to medium-sized enterprises (SMEs) in the UAE was not a concern, according to the UAE Minister of Economy Sultan Bin Saeed Al Mansouri, who emphasised on the growth potential of the SME sector.
“Loans granted by banks to SMEs in the UAE represent 3.8 per cent of total loans portfolio, a minor percentage that is not commensurate with the importance of the sector and the employment it provides,” he told delegates in his opening remarks at the sixth UAE Conference on SMEs and Innovation, organised by the Ministry of Economy, on November 23. “This sector today is on the verge of a new phase of growth and development that will see a significant shift in the coming stages, especially in providing facilities and financial incentives for citizens and ¬entrepreneurs,” he added.
The Minister of Economy pointed out that some 350,000 companies in the UAE fall under the SME category and provide jobs for more than 86 per cent of the private sector workforce. Additionally, SMEs currently contribute more than 60 per cent of the country’s GDP. The sector is projected to strengthen its contribution to 70 per cent within the next six years in line with the National Agenda of the UAE Vision 2021.
Even as loans to SMEs begin to slow, bank balance sheets are still growing and lending to small businesses will not stop, according to senior officials in the country. Allaying fears that the rise in loan impairments will drastically reduce SME lending by banks, Mubarak Rashid Khamis Al Mansouri, Governor of the Central Bank of the UAE, told Gulf News last month that the UAE government and the central bank is committed to the development of a healthy SME sector. “We need to offer institutional support to SMEs to better deal with market forces and offer them credible credit guarantee scheme in order to decrease risks of default,” Al Mansouri said.
Banks facing a surge in defaults on small company loans are closing off credit to the sector in UAE, in a sign of brittle business confidence in the region amid a sustained slump in oil prices. 
AbdulAziz Al Ghurair, Chairman of the UAE Banks Federation, estimated loans to SMEs of between Dh5 billion and Dh7 billion were at risk of default, after the country’s national body that pools information on banks’ loan exposure revealed over-borrowing by SMEs. However, Ghurair called the UAE banks’ SME exposure insignificant when compared to their total loans of Dh1.4 trillion. “When banks discovered this [shortfall], they didn’t extend additional funding and so some customers panicked — they knew they had a problem and they ran away,” he told reporters at a conference in Dubai in November. 
Ghurair, who is also CEO of Mashreq, Dubai’s third-biggest bank by assets, said lenders would place tougher restrictions on SME lending in future. 
A report by UAE lender Gulf Finance, which surveyed the SME sector in October, found that the slowing of the global economy was permeating to the local economy at a faster rate than anticipated. In a statement released with the report David Hunt, Gulf Finance CEO, said, “Although growth opportunities for SMEs still preside, the less bullish and increasingly pessimistic sentiment in the market is evidence that the effects of a slowing pace of economic growth are beginning to impact SME performance.”
UAE banks have had to issue conventional and Islamic bonds to raise finance as falling oil prices restrict access to liquidity or other sources of funding amid a growing liquidity squeeze in the region.
Concerns about the impact of lower oil prices on the broader GCC economy come as member states such as Saudi Arabia slash budgets, threatening to undermine private sector companies heavily dependent on state expenditure. Tighter capital expenditure spending is already causing payment delays for contractors in the kingdom and other countries, which invariably has a knock-on effect to smaller companies. 
Small businesses form the bedrock of employment in the UAE, especially in Dubai. The government is targeting SME growth as a means to boost employment and encourage UAE nationals to transfer from public to private sector. After years of growth, Dubai’s real estate sector is coming under pressure as prices begin to fall. Analysts fear that a rise in US interest rates, further oil price weakness and capital outflows from emerging markets could trigger further declines in property valuations. 
— With input from the Financial Times