Saudi may struggle to boost SME lending

Published November 24th, 2011 - 03:54 GMT
Loans to SMEs are about 1.8 percent of lending, data from the central bank and the Saudi Credit Bureau show
Loans to SMEs are about 1.8 percent of lending, data from the central bank and the Saudi Credit Bureau show

Saudi Arabia, the world's top oil exporter, may struggle to create jobs through small businesses as concern that a global economic slowdown will prompt banks to become more risk averse. The kingdom aims to raise total loans to small-and-medium businsesses to 300 billion riyals ($80 billion) in five years from about 15 billion riyals now, according to the Saudi Credit Bureau. Loans to SMEs are about 1.8 percent of lending, data from the central bank and the Saudi Credit Bureau show.

In the United Arab Emirates, the second-biggest Arab economy after Saudi Arabia, lending to SMEs was about 4 percent of total loans, according to a 2010 World Bank study. "Banks will continue to shy away from lending to SMEs because if the current crisis in the euro zone aggravates, oil prices will fall steeply," Muzammel Hussain, financial adviser at the Riyadh-based Aldukheil Financial Group, said in an e-mailed response to questions on November 21.

An economic slowdown in Saudi Arabia will make it harder for borrowers to service their debt, he said. Brent oil prices fell 2.9 percent in the past month to about $108 a barrel yesterday. Saudi banks have tightened lending criteria after two family-owned businesses defaulted on at least $15.7 billion of loans in 2009 and the global credit crisis hurt the economy. Growth slowed to 0.1 percent in 2009 from 4.2 percent the previous year, International Monetary Ffund data show. The government aims to lower unemployment in the kingdom, where more than half of new jobs went to foreigners between 2004 and 2009, the International Monetary Fund said in a September report.

Conservative local banks The country needs the non-oil economy to expand at an average 7.5 percent in the next five years to lower joblessness by half to 5 percent, the IMF said. Non-oil output will slow to 5 percent in 2012 from 5.4 percent this year, while growth in oil GDP will grind to a halt next year, IMF data show. "SMEs have the potential to be a large source of employment for nationals, but at present they are not," Paul Gamble, Riyadh-based head of research at Jadwa Investment, said in an e-mailed answer to questions on Tuesday. "

"In addition to the conservatism of local banks, this also reflects the limited capacity of many SMEs to present bankable feasibility studies." Support to SMEs will likely come mainly from the government, while "banks will remain cautious," he said. Saudi Arabia's drive to create jobs comes amid a wave on popular uprisings in the Middle East, triggered in part by unemployment. King Abdullah announced a $130 billion spending plan in the first quarter and officials are encouraging graduates to take on businesses dominated by foreigners.

Foreign domination "Groceries are mainly controlled by Bangladeshis," Nabil Al Mubarak, chief executive officer of the Saudi Credit Bureau, said in an interview in Riyadh on October 24. "Have you ever learned that a grocery can make 70,000 riyals a month Do you know that a plumber can make 30,000 riyals a month " Bank lending expanded 8.4 percent in the first nine months to 841 billion riyals, central bank data show.

Al Rajhi Bank, the kingdom's biggest publicly traded bank, increased lending 13 percent to 134.6 billion riyals, according to its financial statements. Samba Financial Group raised loans and advances 8.5 percent to 88.3 billion riyals. Saudi Arabia's three-month inter-bank rate, at which banks lend to each other, has risen 12 basis points from its lowest level this year on July 18 to 0.719 percent, according to data compiled by Bloomberg.

The UAE inter-bank rate has fallen 2 basis points to 1.499 percent, the data show. Big business lending While HSBC Holdings Plc forecasts an increase in lending this year and next, banks will prefer to deal with individual borrowers and larger companies, said Racan Aboredaif, deputy head of commercial banking at Saudi Investment Bank, a Riyadh- based lender.

Saudi Arabia identifies an SME as a company with a revenue of 100,000 riyals to 30 million riyals a year, Al Mubarak of the credit bureau said. "There is enough business and it's simple and I know how to do it, so I'm not obliged to go for a business that I don't understand," Aboredaif said in a phone interview on November 15. "As a bank, I can go for the corporate, do good business and good profit, not for a business that I don't understand and that only a few people know about." Saudi Investment Bank's net interest margin, the difference between what it pays depositors and what it earns from loans, rose to 2.82 percent at the end of 2010 from 2.12 percent a year earlier, according to data on Bloomberg.

For Abu Dhabi Commercial Bank PJSC, the UAE's third-biggest lender by assets, the margin was 2.46 percent in 2010, the data show. Lending risk The Saudi Credit Bureau is collecting data about small businesses to help banks better price the risk of lending, Al Mubarak said. Each bank will have a separate department dedicated to SME lending, reporting to the chief executive officer, he said. Funds dedicated to SME financing are trying to fill the gap.

The Islamic Development Bank will allocate 300 million riyals to a 1 billion riyal fund managed by the Islamic Corp for Development, one of its units, Khaled Mohammed Al Aboodi, CEO of ICD said. - Bloomberg News For banks, lending to small companies depend on the "risk appetite" of each institution, Murad Ansari, said an analyst at investment bank EFG-Hermes Holding SAE in Riyadh. "SME lending involves less collateral support for the banks, meaning additional risk taken on by the banks," he said. "This is mitigated by higher spreads charged by banks." One challenge is that Saudi youths may look down upon small projects, Al Mubarak said. "You know our Arab youth. They say 'I am Saudi, I have oil, I don't do such work.'"

© Muscat Media Group

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