Across the UAE, the SME segment today accounts for 60% of GDP, a figure that is expected to jump 10% by 2021. The segment has been touted as the backbone of a modern, flourishing economy, but one issue remains; that SME financing is not attractive to banks. This problem, which is not unique to Abu Dhabi, is making it difficult for the Emirate to realize the potential of its SMEs.
SMEs are a proven contributor to the economy in terms of employment, accounting for 86% of private sector employment between the 300,000 and 350,000 SMEs that are registered across all seven Emirates. In the wake of the economic slowdown, SME businesses have been affected by the tightening of liquidity. Seen as a capital-intensive and high risk segment, banks have been increasingly stringent with SMEs, causing some concern amongst the top financiers and policymakers who have pinpointed the necessity of their growth to create a buffer zone against economic shocks.
The importance of SMEs to the UAE economy was highlighted during the inception of the 2030 Vision, whereby their role was outlined to cluster around leading national industries and companies to provide services, access knowledge transfer, and form a safety net against external economic pressures.
SME failure is between 30% and 40%, which does present substantial risk to banks. This is partially offset by Khalifa Fund’s financing of SMEs owned by nationals. It has financed AED1.4 billion ($380 million) for businesses, and finds the failure rate in line with privately financed businesses. Typically, SMEs are seen as the first businesses that will default on loans when the economy goes through a muted period. NBAD reported a 73.3% increase in defaulted loans in 1Q2016 and through the year up to 2015, SMEs defaulted on about $1.4 billion worth of debt. This has been an endemic issue that reflects the lack of bankruptcy and insolvency law, as debtors look to flee the country as opposed to settling debts. They are also the first hit when lending gets tighter, usually needing faster access to capital to cover expenditure and overheads. Conversely, UAE SMEs account for 6% of deposits and 3.8% of total loan portfolio across the country. All the while, the 120 SMEs that the Khalifa Fund have financed and have been in operations for three or more years have generated AED50 million in revenue.
The issue then lies in making banks more attracted to SME financing, but without artificially supporting the segment, which could flood the market with risky financing. World Bank data shows that in high-income countries in the OECD, debtors recoup an average of 72.3 cents on the dollar. The UAE retrieves a meager 29 cents. It is said the policymakers thus need to remove the criminal implications of bankruptcy so that creditors can look into ways of restructuring debt, rather than have absconders who flee the country. It is estimated that these business owners have left unsettled sums worth between AED5 and 7 billion. Abdul Aziz Al Ghurair, the Chairman of the UAE Banking Federation, feels that this a relatively minimal amount, highlighting that this figure equates to just 0.4% of the total banking assets across the UAE.
In March of this year lenders agreed to halt criminal prosecutions for bounced checks written by SMEs, showing progress. Further advancements need to be made, such as allowing businesses to offer assets as collateral to ensure re-financing so that distressed business can reposition their assets as a way to move back to the market and to continue generating revenue. Post-commencement financing needs to be properly structured for businesses to have viable ways of maintaining asset value once insolvency has been registered, in order for the company to return to the market, or preserve the valuation for the company to be acquired be another party.
It is pivotal for the UAE to structure SME financing properly to allow the segment to flourish and add value in terms of innovation, security, and job creation, whilst simultaneously making the country a more attractive destination for investment.