Going slow, but not small: why is GCC lending to SME's lagging behind?
Small and medium enterprises (SMEs) comprise around 60 per cent of the UAE’s nominal GDP and account for the lion’s share of private sector employment. Yet bank lending to SMEs remains dismally low in the region.
A World Bank study, which examined the levels of bank lending to SMEs in MENA, found that the share of loans given to smaller firms was the lowest in the world.
“The share of SME loans among total bank loans is just two per cent in the GCC,” said Roberto Rocha, senior advisor, World Bank.
“The average for the MENA region is 7.6 per cent while the level of lending in non-GCC countries in the MENA is 13 per cent which is substantially higher.”
Research suggests that only one in five SMEs in MENA have a loan or a line of credit.
According to a whitepaper released by the UAE’s Khalifa Fund on SME financing, the rejection rate among SMEs applying for a loan in the UAE ranges between 50 to 70 per cent.
Experts say that one of the factors behind constrained bank lending to smaller firms is the lack of progress among SMEs in building a proper financial infrastructure.
Rocha said that the three main components of SME financial infrastructure are lacking in the region.
“All banks and creditors in the world complain about SME opacity but in the MENA region, this problem is particularly acute,” he noted.
“The second problem that we noticed is the lack of coverage of credit registries. There is very little information on credit worthiness and even if you have the accounts, credit histories are not well recorded.
“The coverage of the SME sector is not very good and hence the quality of information is not very good. As a result, the registries and bureaus cannot give credit scores, they cannot give SME ratings because the information is not there and that is another obstacle that creditors face, a lack of information,” said Rocha.
The economist added that the region also lacks a good collateral registry making lending to SMEs a tedious process on the whole.
“A good modern collateral registry is a centralised, electronic, easy to access database where a creditor, when they receive a loan application, can see whether that SME has some collateral to offer either in the case of inventories or receivables,” he said.
Bankers also point out that the cost of enforcing a collateral becomes high, making it an unattractive option when lending to SMEs.
“The cost of enforcement of the collateral is very high which does not make it very feasible in case of small ticket lending which is the SMEs typically fall,” said Rohit Garg, head of Business Banking at Mashreq.
“You can also not register a charge on the current assets of the company. SMEs do not have a lot of fixed assets, so they typically need to finance their current business for which they are asking for working capital.”
Garg explained that SMEs resort to obtaining inventory finance so that they can build up their inventory, which could be pledged against the finance and can be used as a current asset. But the lack of a mechanism to register such current assets might curtail SME lending by banks.
The absence of a bankruptcy law and a proper credit bureau are also major obstacles to lending to SMEs in the UAE, Garg said.
“But the first thing we need to have is the credit bureau. So Al Etihad Credit Bureau has fixed that gap which is the first step and the new SME law is the second step.
“These are the two most important pillars and if we have these two, a large part of enabling infrastructure to lend to SMEs is in place. And then we can have more add-ons like a rating agency, which would benefit larger SMEs”.
The UAE ratified an SME law recently to boost the country’s economic prospects including SME leading.
The legislation mandates a specific “development bank” to assign around 10 per cent of its annual financing to SMEs while providing them with tax incentives. It also requires 10 per cent of future federal government contracts to be awarded to SMEs.
Rocha said that SMEs in the region should also improve their financial reporting to solicit funds from banks.
“Every creditor likes to have a set of accounts, a business statement, balance sheet, something that is reliable,” he says.
“So many countries are now following IFRS for SMEs, which is a very simple version of the international IFRS.”
Banks can also use entrepreneurial finance labs to ascertain the creditworthiness of SMEs, the economist added.
But despite the difficulties in accessing finance, SME lending in the UAE is on the rise.
“Between 2009 and 2011, SME lending took a big hit because economic activity overall was slow but between 2012 and 2013, lending to these firms has picked up in a big way,” explained Garg.
“Banks are also lending support to SMEs because they know that plans are now reflecting in their balance sheets. Lending to smaller firms is far from being stifled but is growing robustly in the UAE, he said.
“More and more banks are entering into this space and are keen to start lending to SMEs.”