Lending a hand to start-ups in the UAE

Published November 30th, 2011 - 10:01 GMT
It’s important to encourage these kind of business because it nationalises the local economy
It’s important to encourage these kind of business because it nationalises the local economy

Small and medium enterprises (SMEs) make up 95 percent of the UAE business community, employ 42 percent of the Dubai workforce and contribute 40 percent of the UAE’s GDP. They are cited by many as the backbone of the economy and have proved a much more resistant sector during the recent downturn.

In the last decade, the country has seen rapid expansion of these businesses as the UAE government and various private entities have rallied to create a more fertile ground for entrepreneurs. “It’s important to encourage this because it nationalises the local economy. You want local capital and a population more involved in the economy so in the case of economic shocks you have less capital flight out of the country. It’s important because it creates an element of stability in the economy,” said Dr Ahmad Khalil Al Mutawa, CEO of Khalifa Fund.

During the first half of 2011, government departments provided procurement contracts worth over Dh40 million to Dubai-based SMEs. The contracts are part of an initiative begun by the Dubai government in 2003 that 5 percent of all government and semi-government department procurement budgets are dedicated to helping SMEs registered with the establishment. As the UAE grew and diversified its economy away from its oil sector, SMEs have flourished in all industries.

“We’ve always been surprised as to how many good companies there are in the different segments. There are a lot of companies that are or almost are market leaders in their sectors that are SMEs. That speaks to a macro-economic trend in this region that multinational corporations haven’t taken over and dominated every sector. Part of the reason for that is that regional integration hasn’t happened as quickly as every-one thought,” said Tom Speechley, a senior partner of Abraaj Capital and the Chief Executive Officer of Riyada Enterprise Development (RED).

The growth of the sector has played a key role in developing not only the national economy but the job market as well. “Entrepreneurship is a key vehicle to improve economic conditions and expand job creation in the region. It is especially critical in light of the region’s shifting demographics and ‘youth bulge’, which is introducing millions of youth throughout the region into the labour market. We have a very young population and we need to create more than 50 million jobs for them over the next decade just to stand still on unemployment,” said Speechley.

Growth areas

According to Mohammad Johmani, CEO and Founder of O2 Network and a Young Arab Leaders Member, the food and beverages and information technology sectors have witnessed the most growth. Rachel Wunsch, general manager of Al Tamimi Investments, said she’s seen considerable growth in green concepts. As the number of start-ups grows, so does the number of niches in industries looking to be filled. “There are niches and new ways of looking at all sectors. An example might be the IT and healthcare industry. We all know the demographics are there for increased healthcare needs. How do you address it? One of the ways you make a hospital more efficient is to bring in IT,” said Speechley.

For a long time the sector was left without a definition. In 2005 the Shaikh Mohammad Bin Rashid Establishment for SMEs put out guidelines for what constitutes an SME. Since then the DED has been putting together an SME law which is expected to legally define what an SME is. “A definition is important because once you identify what an SME is, you can identify which segments of the economy you are serving and what kinds of incentives you want to give them. If you don’t define what an SME is, you cannot place laws that can support them,” said Dr Al Mutawa. However, the industry still has a long way to go before it can reach the same standard as the UK or US. According to Speechly, SMEs employ 70 percent of the workforce in the Middle East but contribute less than a third of GDP. In developed countries, only half the workforce is employed by SMEs, but they contribute 50 percent of GDP.

One of the major challenges facing the industry is financing. A lot of start-ups turn to savings, families or friends for the initial capital, but for more ambitious ideas or for those in industries that need a larger capital injection, getting that head start has proved a major obstacle. “To date a lack of funding has been their biggest challenge. It is improving. You’re finding pools of capital being committed to SMEs all the way from start-ups through to the global equity we do. Even banks are looking to dedicate more for SME financing, but it’s not enough at this stage. The amount of bank loans going to SMEs in proportion to small loans is very small indeed,” Speechly said.

According to Johmani, banks are ignoring SMEs, refusing their applications due to the fact that, in the banks’ opinion, the business is unstable and risky. “All over the world, it is known that, yes, SMEs are unstable and risky at the start, but could turn into profitable, economy supporting businesses. We all saw what happened to stock market and real estate in 2008, which were supposed to be risk-free businesses. In my opinion, I believe that the higher the risk, the greater the opportunity,” he told Gulf News.

Recently, the DED announced the possibility of launching a secondary IPO market specifically for SMEs to boost their credibility and potential for getting equity. “Today’s SMEs cannot fulfill the DFM requirements. If you want to invest in a company and it’s a small or medium company I think the secondary market is a great place to be in. I think there are a lot of SMEs out there that people would be interested in investing in. The beauty of SMEs is that they grow and the growth opportunity would be much higher with this secondary market,” said Abdul Baset Al Janahi, CEO of the Shaikh Mohammad Bin Rashid Establishment for SMEs.

Another major setback the industry faces is a lack of corporate governance. Many SMEs are run as a family business where widely accepted financial diligence is sometimes not applied. “If we are planning on taking some of the SMEs to the next level we need to prepare them in corporate governance,” said Al Janahi.

Stunning variety

The textile souq in Bur Dubai. Recently, the DED announced it may launch a secondary IPO market specifically for SMEs.

Timeline, SMEs initiatives

In August 8, 2011: Dubai SME, entrusted with the development of the small and medium enterprise (SME) sector, joins hands with Hawkamah — the Regional Institute for Corporate Governance — to develop a code for SMEs on Corporate Governance.

In June 25, 2009: Sharjah Chamber of Commerce and Industry (SCCI) launches the small and medium enterprises support initiative that aims to strengthen the competence of companies in the emirate.

In August 2, 2007: Small and medium enterprises account for roughly nine percent of an estimated $118 billion (Dh433.28) investment in the industrial sector in the GCC, according to research.

In March 22, 2007: Minister of Economy Shaikha Lubna Al Qasimi states that small and medium enterprises will be omitted from the draft UAE competition law that will bring changes to the federal commercial Companies Law.

In March 12, 2007: The Dh300 million Khalifa Support Fund for Small and Medium Enterprises known as Bedaya announces that it will provide entrepreneurs with zero interest financing up to Dh1 million to support new or established small and medium projects aiming to expand.

In July 10, 2005: The Department of Economic Development signs an agreement with Emirates Bank’s Al Tomooh programme for the sustained development of small and medium enterprises owned by Emiratis.

In June 12, 2002: Shaikh Mohammad Bin Rashid Establishment for SMEs is formed to encourage and facilitate the development of business and entrepreneurial activity among Emiratis.

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