Khaleej Times explores the growing role of small and medium enterprises in the UAE and how banks in the region are boosting lending to the sector. With the uae's non-oil GDP projected to grow at a steady rate over the next few years and with Dubai winning the bid to host Expo 2020, there are an increasing number of opportunities available for small and medium enterprises (SME s)sector to flourish. "I think it is widely recognised that the SME sector continues to be an integral part of the local economy," said Rehan Ali , head of business banking, National Bank of Fujairah (NBF). "Over the past years we have seen the size of this segment grow, with the Ministry of Economy estimating that it employs up to 86 per cent of the private sector and makes up 40 per cent of the country's GDP." "With Moody's forecasting real non-oil GDP to expand by 4.8 per cent in 2014, not to mention the positive spin-offs resulting from the successful Dubai Expo bid, there is little doubt that small businesses will play an ever increasing role in the growth of the UAE ," predicted Ali. A 2012 Shell Foundation and Citi Foundation report found that SMEs in most developed economies represent between 60-70 per cent of employment and more than 50 per cent of GDP. According to the UAE Ministry of Economy , nearly 300,000 SMEs account for 92 per cent of UAE companies, and employ 86 per cent of the private sector workforce, while the global international development organisation, Spark, estimates that 19 per cent of the world's entrepreneurs come from the Middle East . Although Dubai is fast becoming a premiere hub for SMEs in the region, entrepreneurs still face many challenges when it comes to starting their businesses. Nilanjan Ray , managing director of Commercial Banking — Gulf, National Bank of Abu Dhabi (NBAD), listed the rising costs of utilities; frequent changes in business regulations; delays in payments and collections; volatility in the cost of raw materials; availability and cost of skilled labour; high cost of operations; and the lack of clarity on business licensing and registration procedures as the key problems facing entrepreneurs in the UAE . "SMEs are the growth engine of the future and the backbone of the economy," said Ray. "They are required for economy growth. They need access to finance to set up, expand and hire. If they do not get access to lending, they will lose out on opportunities and their ideas will fall apart. SMEs are considered as 95 per cent of the non-oil businesses in the UAE today." "At large we can think of the Expo 2020 as a win that will boost Dubai's market in specific and the UAE's as a whole. Such a great opportunity will attract investors from all over the world, introducing new ideas and investment opportunities in real estate and businesses. These include large scale infrastructure projects in Abu Dhabi such as the development of Kizad and twofour54," added Ray. Vikas Thapar , head of Business Banking at Emirates NBD noted that SMEs are usually individual or family run businesses, where the key funding comes from the individual owner, family or friends. However, with the growing business, the finance requirements of the SMEs always tend to be more than the available capital. Furthermore, he explained that SMEs require appropriate advice for various products especially with Trade and Forex . Another critical aspect, which is usually overlooked in the initial phase, is the professional set up and discipline of book keeping and accountancy. Thapar pointed out that ready access to capital and business banking services, particularly as a result of lack of financial accounting discipline, are some of the biggest obstacles faced by SMEs in the region. "As a sector, SME is moving through a more stable phase from a UAE perspective. Manufacturing, food and beverage, logistics, transportation, and media — these are the verticals where we're seeing a lot of traction happening in the UAE . New companies are either setting up in these sectors, or existing businesses are expanding," Thapar revealed. "SMEs are crucial to the diversification of the UAE economy, because while large entities can be vulnerable to many external and internal risks, SMEs often face lower risks because of their agility," added Thapar. "According to the UAE Ministry of Economy , SMEs contribute an estimated 40-46 per cent of nominal GDP in Dubai , and more than 60 per cent of the UAE's GDP. They also host the majority of employment opportunities in the country and provide 86 per cent of all private sector employment." When asked about how NBAD was boosting lending to the SME sector, Ray explained that NBAD had signed MoUs and partnered with the Khalifa Fund , MBRE, Dubai Chamber, ADCCI, ADDED, Kizad and Rak FZE. "Such alliances allow us to grow our reach with SMEs. We have a mandate to expand our lending to SMEs and committed to a long term plan to achieve this," said Ray. He added: "NBAD commercial banking is looking forward to increasing our market share of SMEs in 2014. We are also looking forward to the government introducing a credit bureau for SMEs, corporate governance law/code for SMEs, bankruptcy law and the leasing of an assets registration law that would open avenues in SME lending." When asked about NBAD's plan and outlook for 2014, Ray said: "We have expanded our lending moderately in 2013. However, we are looking forward to an aggressive growth in 2014 and beyond. We have allocated significantly more resources in terms of staff and capital in this direction. We are also expanding our product portfolio to include several options to finance income producing commercial assets. Similarly, Ali revealed that NBF also planned to increase lending to the SME segment. "As one of the earliest entrants into this sector, we remain in a strong position to leverage our experience and expertise to provide customised solutions for our business banking clients. SMEs currently account for 13.9 per cent of our loan book, and we are optimistic that this part of our business will grow 20-25 per cent year on year over the next three years," Ali said. "NBF is privileged to have a ringside seat to the contributions made by SMEs to this country, and we look forward to partnering them in their ongoing growth and success," he added. When asked about Emirates NBD's focus for 2014, Thapar said: "Emirates NBD had already identified SME as a key focus area since 2009. We have been consistently growing our exposure at 30-35 per cent year-on-year, and continue to support the segment. Our growth aspirations would continue the trend." He explained that Emirates NBD's Business Banking division had witnessed a robust growth on all fronts. "Our banking activities cater to about 60,000 SME clients, and we have relationship managers for about 35,000 companies. The remaining companies fall under the micro-SME category, which we manage on a portfolio basis," explained Thapar. "Lending was identified as a key focus area for 2013 and we are absolutely delighted with the progress that we have made. In 2013 we have extended Dh1.5 billion facilities in terms of working capital finance, term loans and trade finance." He added: "We've been successful for the past few years and our aspiration is to double this growth in three to five years. We have many expansion plans in place, and our management supports us to take this growth to the next level."
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