Visit a company register in a developed or rapidly developing economy any day of the week and you will immediately see the challenge facing SMEs (Small and Medium Sized Enterprises). The majority of them go out of business within 3 years. But every day, there are new small companies being created, not put off by this chance of failure.This is why, in the UAE as a whole, some 92% of businesses are categorised as SMEs. So perhaps SME should stand for supporting the market economy.
Banks are often held out as being a principle cause of SME failure, because they do not lend enough to them. Indeed, at first sight the figures would bear this out. Lending to SMEs could barely reach 4% in UAE, and 8% in the Arab Region. And a recent study by the International Finance Corporation (an arm of the World Bank) echoes the same point, suggesting that a funding gap of more than US$ 13 billion exists for SMEs in the Middle East as a whole.
But there is a gap of knowledge among entrepreneurs with very small or start-up companies about what banks need to enlist their support.
While the financial crisis may have made many banks reel in their lending to anyone but the most creditworthy for a while, the fact is that banks often make the difference between an SME succeeding or failing.
The UAE Banks Federation has a specialised committee in which senior commercial representatives of UAE banks work together to agree how they can best support SMEs. The Committee seeks to align all member banks in stimulating growth – and better survival rates – in this crucial sector.
The Federation both supports and applauds the government’s efforts to help SMEs. The SME law, published at the beginning of the year, sets up a dedicated council to oversee work in this area. Other efforts have included SME seminar hosted by the UAE Central Bank during the year, as well as institutions such as the Khalifa Fund, SME Dubai, IFC representatives and others actively supporting SME owners through skills based and financial support.
But, as with so many things in life, a few simple principles apply. However elaborate or meticulous the SME support network is, SMEs need to tick a few very important boxes themselves to gain the interest and support of banks.
The first is very basic indeed. The S in SME stands for small, not for start-up. An SME with a trading record has a much better chance of attracting finance from a bank than a start-up. Banks have responsibilities to their own stakeholders, and need evidence of an enterprise’s viability before they can risk resources to commit to it. This normally means 1 or 2 years of its business life cycle, and in particular it means a good sense of how well the company is structured and how sustainable its business is for it to succeed.
The key lesson here is that before it formally becomes an SME a new enterprise needs to build a strong relationship and track record with its bank to gain its trust and support. A bank that has worked alongside a start up by providing it with an account and advice for 1-2 years will be able to make a better informed and confident credit decision than if it has not. It can also provide different types of support at different phases of the SME’s life cycle.
For small companies, the main goal should be managed growth, which means not doing too many things too soon, and phasing its investment and growth in such a way as to build a solid platform for the more rapid growth that may follow if all goes well. We don’t have to be like Singapore, for instance, where the average successful SME is sold within 3 years and the entrepreneur then immediately moves on to do it again. Here in the UAE the idea of selling an SME so soon is not so common, but that is not to say it should not be part of the overall strategy, allowing successful entrepreneurs to replicate their achievements for the good of the overall economy.
The primary issue facing SMEs in the UAE is not in my view the availability of finance, and the UAE is by no means special in the challenges its SMEs face in getting started. The issue is where the finance comes from for start-ups. A few schemes currently in place, including new crowd funding-type options like Eureeca and Kickstarter, provide this up to a point.The gap also includes Shari’a compliant financing for SMEs. The IFC found in their survey that only 17% of the 160 banks that took part offered special facilities for Islamic SMEs.
The fact is young entrepreneurs need to understand how they can better engage the support of banks to help them on their way.There is definitely scope for banks to provide more finance for small companies.But for a start-up to become a small company and then a medium and even larger sized enterprise, a strong, two-way and open relationship with their bank from the very beginning is absolutely essential.
HE Abdul Aziz Al Ghurair is Chairman of the UAE Banks Federation.
