Funding, regulatory challenges major roadblocks for SMEs in GCC

September 21, 2016 5:35 pm

To the utter shock of many, a new report reveals that only two per cent of the total bank lending across the Gulf Cooperation Council (GCC) goes to small and medium enterprises (SMEs), the lifeline of the region’s economies.


Lack of funding and regulatory hurdles are the biggest challenges the SMEs in the region have to tackle to survive, according to the latest research by recruitment portal BLOOVO.COM.


The figures show that finance rejection rates have crossed 75 per cent for most GCC countries as lenders are grappling with the worsening liquidity squeeze.


“Funding challenges are a big constraint for SMEs. They find it very difficult to raise conventional debt-based finance due to risk-aversion on the part of lenders,” says Iyad Abu Hweij, co-founder and president of BLOOVO.COM.


Not so business-friendly

Regulatory burdens are also hindering the growth of the small firms. The region’s countries have poor rankings in the ease-of-doing-business indexes.


According to Abu Hweij, lon-pending reforms in regulation and legislation, and a “lack of emphasis on modernising the education sector to produce the talent needed to create knowledge workers” are the other challenges faced by the SMEs.


“A lack of research, data and reports also hampers effective decision-making,” he adds.



Defaulting will be a nightmare for the SMEs in the region as proper bankruptcy laws are either non-existent or not very efficient.


“There is also no way to fail safely because of financial laws. Fortunately, measures like the soon-to-be-implemented UAE bankruptcy law will lead to a more facilitative and mature financial environment for SMEs,” Abu Hweij says.


The UAE’s cabinet approved a new bankruptcy law earlier this month, which is expected to come into force by the beginning of 2017.


The law will reduce the risks of doing business in the country by allowing businessmen and executives to avoid time in jail if their companies fail to pay debts.


At present, the UAE does not have modern bankruptcy regulations, making it difficult for companies to restructure or wind up their activities.


Under existing legislation, unpaid debt or the issue of a bounced cheque can land businessmen in jail. That has proved problematic for smaller companies in particular and some executives of troubled firms have fled the country, leaving behind bad debts.


Such debts, known as “skips”, totalled more than $1.4 billion last year, bankers estimated.


In the UAE alone, there are 300,000 SMEs and they contribute nearly 60 percent to the country’s Gross Domestic Product (GDP).


Tightening liquidity

Lower oil prices have severely hit the inflow of deposits from the governments and their related entities, which account for between 20 per cent and 40 per cent of the deposit base of GCC banks.


Credit rating agency S&P Global Ratings said earlier today that banks in the region will remain under pressure for the remainder of 2016 and 2017.


The agency expects that loan growth in the region will reach nearly six per cent this year compared with approximately ten per cent last year. In 2017, growth is expected to stabilize at nearly 5 per cent.


Meanwhile, the UAE Federation of Banks, a lobby group, has said that the lenders have offered an AED7 billion lifeline so far this year to more than 1,700 companies in the country that have run into financial trouble by restructuring their outstanding loans.


BLOOVO.COM’s recommendations

1. Set up SME funds for subsidised financing and effective mentoring;

2. Change company laws to allow more flexibility in structuring companies and allowing greater foreign national ownership;

3. Make intellectual property protection and commercialisation easier;

4. Integrate SMEs into critical supply chains through inclusive procurement policy. For instance, the UAE Federal Law No. 2 stipulates that government authorities and ministries must procure at least ten per cent of their goods, services and consultation from SMEs.


(With inputs from Reuters)


AMEinfo Staff
By AMEinfo Staff
AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.