SMEs: Contributors to the economy facing major challenges
* 350,000 businesses fall under SME category in UAE
* Joining incubators or accelerator platforms can be cumbersome
* Banks and lending institutions not forthcoming to SMEs
SMEs are a strong contributor to the economy in GCC and across the region. Many new local businesses are offering much-needed services and coming up with new, innovative solutions across all sectors.
While celebrated, SMEs face tremendous challenges in the region, starting with the cost needed to set up businesses to finding and retaining talent.
AMEinfo got the chance to speak to Janardan Dalmia, a former investment banker who now works as a budding entrepreneur and is the president and a board member of AIWA, a UAE-based smart, online users to locate local businesses and engage with them, to discuss the status of small and medium enterprises in the region, including the challenges and opportunities that lie ahead.
What is your current overview of SMEs in the Middle East region?
SMEs are undoubtedly some of the most significant contributors to any economy. They foster job creation, innovation, and an entrepreneurial spirit. There are several SMEs operating in the service and trade sectors.
For example, in the UAE, according to the Ministry of Economy, there are approximately 350,000 businesses that fall under the SME category, representing 94 per cent of the total number of companies operating in the country and providing jobs for 86 per cent of the private workforce. Therefore, as a segment, it is very strong, but there are still some challenges in terms of the operation at an individual level and there are still several areas in need of improvement.
What are the top challenges that SMEs in the region face today?
As I mentioned, although SMEs as a segment are strong, there are still certain challenges they face. Let’s suppose someone has an idea and wants to try it out and test the market before turning it into a business idea. There are certain venues through which one can join certain incubator platforms or accelerators, but they are limited to technology companies and one must be selected for the program after a filtration process.
Furthermore, outside of the tech domain, there is no such platform. There is no truly quick and easy way to set up a company to test an idea. If I were to come up with a few challenges, I would think of the following:
Cost of operation: The initial cost of setting up, which includes costs for licensing, renting real estate, and visas, among other administrative charges, is burdensome for a new entity, and the fear of failure reduces the ability of many individuals to take risks. On top of that are the lengthy process of winding up and the costs associated with it if the idea doesn’t work out.
Quality talent: Due to the numerous operating costs, it is difficult for an SME company to find resources to spend on attracting and retaining quality talent. There is also a shortage of quality talent in SMEs due to unrealistic salary expectations. Many qualified candidates find it very difficult to recalibrate their expectations if offered an opportunity at an SME after working at a big, multinational firm because of the huge differences in pay and benefits. Unstructured hiring processes and the lack of internship programs at SMEs hinder companies’ abilities to find young and emerging talent.
Skepticism: I would like to point out that there is an element of skepticism present when clients and customers judge an enterprise. In the absence of a company history, it is challenging for clients and customers to judge the quality of a company’s work and put their trust into it.
Financing: This is probably the most discussed topic in relation to SMEs. Despite governmental efforts to promote SMEs, banks and lending institutions are not forthcoming to new entities. For example, the minimum requirement that banks generally put on paper is a three-year financial history, but seldom do you actually see them lending to a company with a three-year financial history. Even after three years of financials, banks are still not very comfortable lending money, which creates pressure for new, growing companies to manage their growth and operations on their own. They then need to turn to external resources, which generally do not come cheap.
What are some suggestions you would put forward to overcome these challenges?
Reducing the operating costs, at least for new companies for the first couple of years, would foster an entrepreneurial spirit and greatly increase companies’ abilities to take risks. Subsidising the cost of licensing and rental fees and facilitating visa allocation, among other measures, outside the incubator and accelerator programs would encourage innovation and trial and error processes.
By reducing some of the initial administrative costs, companies could redirect resources towards attracting and retaining more quality talent. This would produce the significant, indirect benefits of promoting diversity, increasing local employment, and providing flexibility for rapid growth.
Having ratings and reviews is another way to reduce skepticism about SMEs. Today, when we are looking to book a hotel room or reserve a table at a restaurant, the first thing we do is read reviews about them. Similarly, reviews and credible ratings on companies allow users to filter through good companies, thereby reducing the overall level of skepticism.
Unbiased ratings and reviews could then be presented to financing institutions, which would allow them to be more open towards lending to relatively new organizations.
We have been hearing a lot about spending with tech SMEs, why are these taking all the light?
I believe technology will be the single biggest economic driver in the next decade. Innovation should not be an afterthought for local companies. Identifying a local problem and then innovating and finding a solution with the help of technology makes an interesting and inspiring business model. Generally speaking, a good technology platform is an asset-light business model, is highly scalable with a low cost of operation, and has a network effect. Without technology, a firm’s growth potential is limited. Technology removes geographical boundaries and provides significant growth opportunities to any company. I am incredibly bullish on the opportunities that exist for technology firms operating in the MENA region over the next decade.
From your perspective, what are the five most promising SMEs today?
I think it is difficult to cherry-pick certain names, as there are plenty of great companies in the making. However, it would be safe to bet on asset-light business models, timeless and defensive businesses (e.g., education, healthcare and low-cost retailers), low-cost service providers, and technology companies.
Amongst these, I think tech companies who possess all the right resources, such as low-cost, tech-enabled scalable platforms, stand out. The differentiating factors are the quality of service and continued investment in innovation, building new technologies, and attracting top talent.
I think there will be several new-age companies addressing local issues and problems in the region in the near future, who have the potential to become major companies over the next decade.