News Column

New legislative changes may encourage more SME lending

August 4, 2014

Dubai introduces reforms to support SME growth: Report

Legislative changes will encourage banks to further extend lending facility to small and medium enterprises (SMEs) and improve their access to finance, suggests a latest report.

"SME lending forms a very small proportion of the total corporate lending by some banks. A large proportion of UAE banks do not lend to SMEs at all," The Dubai Economic Council (DEC) revealed in a report, which was done in collaboration with Pinsent Masons, Zawya, and Intelligent SME magazine.

SMEs are crucial generators of employment and income, and champions of innovation and growth not only in the UAE but also globally. Despite their impact and importance on the economy, SMEs are frequently confronted with market imperfections and have difficulties in obtaining capital and credit, particularly whilst the business is in its infancy.

The report unveils that the most effective way in which SMEs may achieve greater access to credit rests in the development of legislation and regulations governing secured transactions. "The .. report recommends changes to the current legislative and regulatory framework surrounding the creation of security interests, with an intention to encourage banks to further lend to SMEs and in turn improve their access to finance," the report added.

A recent survey conducted among 18 UAE banks to assess the current lending practice to SMEs and the drivers and barriers to SME lending, highlights the need for improvements within the current legal and regulatory framework governing security creation and the enforcement thereof. Most often, UAE bank loans to SMEs are secured against assets. Property held by a SME's parent company or shareholder(s) or cash security/margin are considered strong forms of security by most of the banks surveyed, according to the report. "The 'higher risk of business failure' in SMEs is the primary reason for banks refusing to lend to SMEs, however, 'Insufficient collateral' is cited as the biggest concern for banks when evaluating credit risks associated with SME lending. As such, improvements in the laws affecting the creation and enforcement of security, as well as other measures such as the establishment of a credit bureau, are cited by respondent banks as key reforms that could enhance the confidence of banks in SME lending," it added. SMEs operating in the UAE, like many other parts of the world, often need to rely on their own limited funds to invest in their businesses, however, once the call for expansion arises, external sources are usually tapped in order to take advantage of growth opportunities. Therefore financial sector policies and reforms that aid SMEs in overcoming access barriers are crucial.

Dubai has succeeded in introducing a number of reforms within a relatively short period of time which have supported SME growth. However the Dubai Economic Council (DEC) as an advisory entity belonging to the Government of Dubai is dedicated to continuing efforts to propose critical advise on various legal affairs particularly the issue of broadening access to finance for local SMEs and move towards building an ever more realise that objective.

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Source: Khaleej Times (United Arab Emirates)

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