A teller counts dirham notes. A move by the UAE Central Bank to establish a Credit Bureau, which collects companies’ credit information, will improve lending, say economists. Image Credit: Gulf News Archives

Dubai: SMEs (small and medium-sized enterprises) in the UAE are concerned that not enough bank loans are available to them and at affordable prices.

Only four per cent of bank lending in the UAE goes to SMEs, who make up around 95 per cent of businesses in Dubai. This reflects the difficulty of getting bank loans. Additionally, 86 per cent of SMEs have not sought bank finance, according to the SME’s index launched last year by Dubai SME, part of the Department of Economic Development.

Even when SMEs manage to get a loan, they are faced with paying interest rates deemed high (between five to seven per cent) and not affordable for many.

“The loan rates are very, very high,” Mark Hirst, CEO at Blue Beetle, a web design firm said. “We’re a micro company, so we don’t have tangible assets. There were no decent loan rates we could work with.” Hirst did what many other start-ups have done — he sought funding from his family.


The rejection rate for SME bank loans in the UAE stands at 75 per cent, according to Nasser Saidi, former chief economist at Dubai International Financial Centre (DIFC), and president at Nasser Saidi and Associates.

Among the reasons behind the high rejection rate is a lack of adequate credit history of SMEs. Such information is not collected in the UAE. Thus, banks cannot asses the health of the company and lend accordingly. However, Saidi expects that the move by the UAE Central Bank to establish a Credit Bureau, which collects companies’ credit information, will improve lending — “but it will take some time”.

Additionally, banks are reluctant and resist lending to SMEs that have an owner taking on different business roles. This puts his or her ability to appropriately manage the business into question, according to Saidi.

Also, the banking system in the UAE is dominated by large banks, who find it easier to lend large amounts to big companies, rather than lend smaller amounts to SMEs, he said.

Suad Al Halwachi, director at Education Zone, applied for a bank loan to grow her business but it was rejected. She then received her loan in 2010 from a loan shark within 10 days with a 21 to 22 per cent interest rate.

Suad’s loan was rejected even though she had her financial audited statements in order and a good track record, she said, adding that “business was doing well-hence the expansion”. When asked why her loan was rejected, she said that the bank classified her business as “high risk”.

Suad added that some SMEs she is aware of have had their loans rejected and have since left the country to set up their business elsewhere, after receiving loans from there.

Vijay Samyani, managing director at Concept Brands Trading LLC, who managed to take a loan, said what made it work for him was: “a healthy balance sheet and a good track record.”

Lending on the rise

According to Steve Williams, CEO at Gulf Finance, the lending supply from banks and financial institutions to SMEs in the UAE has gone up in recent years.

“Banks are starting to respond to SMEs. [They] have realised the importance of SMEs to the UAE economy and their contribution to the country’s GDP in recent years hence they are allocating additional funds for SME financing,” Williams said.

In December, Emirates NBD announced that they expect to double their lending to SMEs to over a billion dirhams this year.

There are several factors fuelling lending, according to Williams. Among these is the SME law, which was approved by the UAE Cabinet in December last year. The law stipulates that government agencies, institutions and companies that are wholly or partially (50 per cent) owned by the government will allocate five per cent of their budget (for goods and services) to SMEs.

Despite the increase in lending by banks, Suad said: “SMEs are not supported. If you are a small business, they don’t help you.”

Loan application process

Applying for a loan involves a strenuous document process.

“Banks make it look easy to take a loan, but it is actually difficult,” said Samyani said.

Commenting on the procedures he underwent to apply for the loan, Samyani said: “It was a difficult process. The bank needed a three years’ financial auditing balance sheet; too many other documents; suppliers and customers’ details, and security cheques.”

Banks will first look at the company’s business profile, financial health, and growth plans, Gulf News reported last month.

Next, banks will create a financing structure based on the working capital cycle and nature of the customers’ business. Ultimately, the decision to give a loan is determined by the customers’ market reputation, projected cash flows, industry profile, credit history and historical financial performance, among other factors.

SMEs take loans for a number of reasons: some for planned growth of their business — such as buying vehicles or equipment; while some need a loan for late payments, and others for unplanned opportunities. Businesses that take loans for planned growth are the most successful, says Williams.

Williams advises SMEs seeking funding to do extensive research online on preparing a business plan. They must ensure that they have sufficient capital to avoid failure; and they must create a business model with a unique selling proposition (USP), to differentiate their products and services from those of competitors.

The SME market needs more than six billion dirhams of credit in 2013, according to Williams. He added that he expects the figure to go up by “5 to 10 per cent in 2014,” if the local economy grows at its current rate.