Tax transparency to boost UAE SME lending prospects

Small and medium enterprises (SMEs) are rightly described as the backbone of the UAE economy. They constitute 94 per cent of all registered companies and employ about 86 per cent of the private sector workforce. From trading shops to family-run firms to agile tech start-ups, SMEs are at the heart of the UAE’s growth story.

Yet, despite this outsized role, SMEs face a persistent challenge: access to finance. Of the nearly $515 billion (Dh1.89 trillion) in loans extended by banks in the UAE, less than 10 per cent is directed to SMEs. This stark mismatch between contribution and access to capital potentially risks weakening the very sector that sustains most of the economic activity in the UAE.

The financing gap SMEs face is driven by several structural factors:

1. Perceived high risk: Many SMEs are young, with limited history and little collateral, making them less attractive to banks.

2. Limited transparency: Before VAT and corporate tax, most SMEs operated with minimal reporting, leaving banks unsure about their creditworthiness.

3. Cash flow pressures: New SMEs rarely get supplier credit, but customers demand long payment terms. This creates a working capital crunch where one bad debt can trigger collapse.

4. High lending costs: When loans are offered, they are often unsecured SME loans at 14-15 per cent fixed interest — far above what larger firms pay.

5. The domino effect: Without cash flow, salaries get delayed, employees and clients leave, and suppliers tighten credit, accelerating business failure.

A key issue lies in how SMEs are defined as firms with turnover between Dh5 million and Dh150 million. There is a world of difference within this range:

• Larger SMEs often get adequate funding and attention.

• The smallest and newest firms — the ‘S’ in SMEs — are left out.

This group faces the toughest barriers: small ticket size, higher risk, and limited history. Banks often avoid them altogether when delinquencies rise in downturns.

Clearer SME tiering is required to support and recognise the smallest firms separately.

The introduction of VAT from 2018 and corporate tax from 2024 is a game changer as businesses require structured reporting, verified filings, and proper accounting records in the UAE now. For the first time, SMEs will produce tax returns and financial statements on par with larger firms, and this transparency gives banks what they lacked for long: verifiable data on revenue, profitability, and compliance. With better visibility, risk perceptions could make lending more feasible.

Embracing a more deliberate approach can help define the roadmap for SME financing.

Clear tiering of SMEs: Recognise the smallest firms as a distinct category within SMEs.

Mandatory exposure: Require banks to dedicate a defined share of their lending specifically to this tier.

Tiered pricing models: Move beyond blanket unsecured lending by ensuring rates reflect compliance, tax records, and industry outlook.

Credit guarantee schemes: A state-backed guarantee can share default risk and unlock lending. This model has proven successful in Singapore and South Korea.

Alternative financing: SMEs can also be financed through fintech platforms, P2P lending, and crowdfunding if given regulatory support.

Supply chain finance: Tools like invoice discounting and factoring can ease the mismatch between supplier payments and customer receivables.

Combining tax-driven transparency, clearer SME tiering, and supportive policies can realistically raise SME financing from less than 10 per cent today to 20–25 per cent in the coming years. This shift can further growth of the national economy and sustain SMEs for the long haul. ■