Small and medium enterprises (SMEs) are critical for the economic and social development of emerging markets. They are labor intensive, create jobs, generate income for low income group, promote economic growth, increase social stability, and contribute to the development of a dynamic private sector.
According to United Arab Emirates Ministry of Labor, there are around 350,000 SMEs in UAE, making up 86% of the total workforce in private sector and contributing up to 60% to GDP. The UAE Vision 2021 aims to increase this contribution to 70%.
The biggest concern of SME is access to financial services. Banks play a vital role in this regard by funding for equity, loans, mezzanine finance to financial intermediaries, credit lines, risk mitigation advisory and raising awareness on best SME Banking practices.
On the advisory side, banks support in areas such as strategic direction, market segmentation, product development, risk management and IT/ MIS facilities.
During the last twelve months, many SMEs have packed up and have departed UAE, leaving their companies in trouble and defaulting on their loans. The wholesale traders of foodstuffs and oil were amongst the highly affected. Many analysts deduce that SME’s balance sheet was hit hard by the economic slowdown, triggered by a sharp decline in the price of oil and currency.
Banks in the UAE are cutting credit lines to SMEs after a wave of defaults. A few months back, banks of United Arab Emirates got together and developed a framework, called the “mini bankruptcy law“. This law basically discourages the banks to act prematurely against SMEs financial complications. It also insists on bank advice to SMEs by involving other banks to try and deduce an effective solution.
Furthermore, the country’s banks will coordinate together more, allowing SMEs to arrange for suspended payments, and restructured loans. Bank chiefs have already worked on loan-restructuring scheme for indebted SMEs to help them reduce their debt burden.
The UAE government, also contributing to the facilitation of SME financial services, announced its reformed policy stating that some small and medium-sized enterprises in the country will no longer require a bank guarantee to continue their operations.
A notable initiative for SME sector development in UAE is by National Bank of Abu Dhabi (NBAD). The bank opened a free, business skills academy in September 2015 with the purpose of driving growth in the UAE SME sector. It has trained over 100 small medium enterprises (SMEs) so far in essential skills. The pilot programe focused on the following areas: How to make your Business Bankable; Understanding and Implementing Principles of Accountancy; Understanding Corporate Governance; Attaining Leadership in Customer Service; and Expansion and Growth – Key Strategies. The NBAD SME Academy is surely an innovative step in promotion of SME growth in the region.
To decrease SME’s funding difficulties, the banks have to stay committed in applying a coordinate approach. Further reforms are required to provide SME with institutional support to better deal with market forces and offer them credible credit guarantee scheme in order to decrease risk of default and move towards a bright UAE Vision 2021.