Omani banks and the funding of SMEs
Commercial banks should allocate more funds for small and medium enterprises (SMEs) to spur growth in this sector, which is vital for wealth creation and generating employment on a large scale, said a top-level official in the SME sector. "There are around 120,000 SMEs in Oman, which represents more than 90 percent of the total number of companies and contributes around 20 percent of the GDP. However, if we see SME lending of banks, it is very minimal due to high risk and lack of collaterals," said Salah bin Hilal Al Maawali, director-general of Directorate General for Development of SMEs.
Saying that SME sector is huge in Oman, Al Maawali noted that "if banks do not tap this market now, they will find it difficult to get a share in future". He said several banks, including BankMuscat, Oman Arab Bank, HSBC, Bank Sohar and BankDhofar, have separate departments for SME funding. Twelve programmes Al Maawali said the government has introduced 12 programmes, including a venture capital and a loan guarantee scheme, to help entrepreneurs starting small and medium enterprises in Oman.
The ministries of commerce, finance and Oman Development Bank (ODB) have jointly formed a corpus fund, for guaranteeing repayment of 50 percent of the bank loan taken by small and medium enterprises. The bank loan guarantee scheme for SMEs was introduced by the Ministry of Commerce and Industry, in cooperation with BankMuscat and Oman Arab Bank, in last October. Al Maawali said his department has received several applications from entrepreneurs seeking loan guarantee. "The pilot project is for one year and will guarantee 50 loans. It is a trial programme and we would like to see the drawbacks and strengths and maximise our strong points." To become eligible for getting credit guarantee facility, the capital investment in a project should not exceed RO500,000, loan amount should not exceed RO250,000 and therefore, the loan guarantee is for a maximum of RO125,000, he said, adding: "We also carry out feasibility study for small and medium enterprises seeking loan guarantee. The banks cannot deny a loan facility due to our guarantee."
Apart from access to finance, Al Maawali said training, a good feasibility study and selecting the right technology are also crucial for the success of SMEs. The training programmes have changed over the last ten years due to technological advancement. Al Maawali said as many as 5,000 new SME units are registered with the Ministry of Commerce and Industry every year. "Between 2008 and 2009, the annual growth in number of SME units was 4,700. But it is around 5,000 units now and therefore, the growth is tremendous." According to a study conducted by the Union of Arab Banks in association with the World Bank last year on 'SMEs Bank Loans in the Middle East and North Africa (MENA),' it was revealed that the percentage of loans provided by banks to the SMEs does not exceed 8 percent of total lending operations in the MENA region.
Accelerating growth SMEs are not provided funds for many reasons, and therefore they lose great opportunities to boost their market share. This study covered 139 banks in 16 countries in the MENA region, including six from Gulf Cooperation Council (GCC), and 76 national banks and 34 foreign banks, as well as 29 banks belonging to the state and 110 private banks. The study clearly showed that the share of loans for this type of companies in the GCC does not exceed 2 percent, at a time when other companies in the region have a share of 14 percent. The growth of SMEs in the Gulf region depends on the willingness of banks to financially support these companies.
The best way to promote the Arab economy is to open new financing plans and to make the credit mechanism easier in addition to strengthening relations between banks and SMEs and enhance transparency of these companies. In Oman, SMEs are classified on the basis of number of employees. Those units employ between one and nine workers are classified as small, while those employ between 10 and 99 are medium units. And all companies employing 100 or more are large units.
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