The unsung heroes of UAE’s economy today are our small and medium enterprises (SMEs).
With more than 400,000 companies, or 94 per cent of all registered businesses in UAE, SMEs form the base, core and pivot of the diversified economy. Nearly 90 per cent of the total work force is now engaged in these enterprises, contributing 60 per cent to the country’s GDP.
The UAE government and Central Bank accord high policy priority to this segment, and are keen to boost its contribution to 70 per cent of the national economy by 2021. In this mission, banks have a critical role. Providing SMEs with timely and easy financing that would allow them to grow and innovate is just one of the tasks. Circumstances have evolved and banks are now keen to guide and hand-hold companies as they make it big.
In the past, the relationship between banks and SMEs has varied. It could have been better. While SMEs form bulk of the economy, bank lending to this sector was low, standing at 3.85 per cent in 2016.
The biggest challenge for entrepreneurs, invariably, revolved around financing and cash flow. Even experienced business hands would at times baulk at negotiating with banks for financing, with issues of uncertainty, lengthy documentation and delays in decisions commonly cited by some owners. From a bank’s perspective, however, risk assessment is always of utmost importance, and only transparency and close scrutiny between banks and entrepreneurs can build trust to ensure profitability on a sustained basis.
UAE banks are now increasingly sensitised to the challenges faced by SMEs and have realigned themselves to their needs. Not only do they want to ensure long-term profitability of SMEs, but also add value to their business. Banks are now keen to provide extra support to enterprising and honest business persons, and focus on the need to hand-hold innovative and enterprising business owners. With greater communication and sensitivity to each other’s needs, we in the banking sector can play a vital role in guidance, training and education of entrepreneurs, so that these common goals can be achieved.
Guidance: Start early
In an era of ‘Incubators, Accelerators and Eco-Systems’, banks too are walking the extra mile to help businesses that have passed the start-up stage and are maturing, in a variety of ways — more than just providing financing. Doing due diligence, in terms of understanding the business, inspecting the site or warehouse, assessing the risks in terms of the sector, its demand and supply and the state of financials, is in any case the responsibility of banks before making the decision to approve finance. But what’s changing or rather becoming an imperative need for both parties is for banks to be more proactive in supporting how the business is being conducted and extending efforts to resolve the challenges faced by businesses.
Since the SME segment is complex, and encompasses a wide array of forms: from high-end tech companies to trading to real estate to boutique shops, a one-size-fits-all approach is no longer prudent for us. Many new-age companies are part of ‘incubators’, which assist start-ups with funding, research and marketing. The needs of this sector are new and unique. We are thus looking for solutions that cater to the niche needs of the vast SME segment, and also getting involved in their life cycle, as they move from micro, to small and then scale up to be mid-sized and big.
An understanding of the nuanced business needs of all segments also helps banks to make a swifter and prudent assessment of a company’s financial needs, risks and viability, allowing the partnership to work better.
Training: Financial discipline
An integral part of this journey is financial discipline of an entrepreneur. Whilst most SME owners understand the importance of financial management, they often pay inadequate attention to it. Many business owners try to manage the finance directly, which may be viable only for a small operation, but does not evoke confidence in a banker.
According to a survey, ‘Dubai SME: The State of Small & Medium Enterprises’, conducted among 500 companies in 2014, it was revealed that, only 50 per cent of business units maintain audited financial statements. Fifty per cent maintained websites, of which 6 per cent had online ordering capabilities. Moreover, only 25 per cent had dedicated HR employee/department and 26 per cent could provide training to their employees. In such circumstances, we encourage our clients to focus on book-keeping, maintain proper audited financial statements, done by credible auditors. Financial data hygiene will ensure that banks are comfortable dealing with the client companies, thus ensuring swifter processing of financing papers.
Educate via open platforms
In this partnership, transparency is the key, and there is need for the financial sector to hold effective SME-bank interactions, so that each is sensitised to the challenges and demands of the business ecosystem.
Seminars between entrepreneurs and banks are a good way to bring to light key challenges facing SMEs, which usually revolve around government policy, new-age concepts like digital marketing and staff training. For instance, knowledge about the value-added tax (VAT) regime, which came into effect on January 1, 2018, is extremely essential to companies, and seminars, councils and ‘open dialogues’ are a good way to collaborate and facilitate stronger communication. It’s a two-way street and our endeavour to hear each other out.
Businesses today are operating in a very different ecosystem, where technology and digitisation play crucial role. Banks too must understand the changed needs of their clients and use their vast experience of finance and risk-assessment to guide and collaborate and educate tomorrow’s business pioneers and new entrepreneurs.
Usman Khakwani is the head of Business Banking at Noor Bank and the views expressed here are his own.