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Holding the key: SMEs play major role in economic growth but struggle to gain bank funding

Small and medium-sized enterprises (SMEs) need better access to finance instead of being forced to pay high interest rates and stringent conditions to gain bank loans, a new report states.

However, the report published last week by Allied Investment Partners (AIP) adds that governments in the Gulf Cooperation Council (GCC) are addressing the issues faced by SMEs with a number of initiatives.

SMEs are often considered a higher risk by banks and, when they try to access debt finance, experience ‘cumbersome’ processes and an inability to meet guidelines set down by ‘stringent lending norms’, according to the report, titled Financing of SMEs and Mid-Market Companies.

It states that SMEs play a significant role in regional economic growth but adds that ‘obstacles and bottlenecks’, such as lack of adequate finance or investor uptake can impede growth, with banks in the GCC allocating just two per cent of loans to SMEs, compared with 13 per cent in the wider Middle East North Africa (MENA) region and 24 per cent in Morocco, according to AIP.

In response to emailed questions, Karan Bansal, head of private capital at AIP, cited a lack of collateral as one of the reasons why newer and smaller firms often struggle to access debt finance.

“SMEs tend to be informal, young, have less publicly available information, and operate in unfamiliar sectors, all of which results in higher information asymmetries and risk, discouraging bank lending. Many times, these firms also do not have enough assets that can be used as collateral,” he said.

Despite this, Bansal said governments across the GCC are seeking to counter the challenges for SMEs, which also include lack of transparency over financing terms and investment criteria, as well as lack of ecosystems to support small-sized transactions, such as public equity funding deals.

The Central Bank of the United Arab Emirates is coordinating with the UAE Banking Federation for the revision of rules and operating procedures for lenders dealing with small companies, he said.

And he also cited the Dubai Future Foundation as a driving force for supporting SMEs, with projects such as the Dubai Future Accelerator programme and Area 2017 building a nurturing environment for MENA startups in the Emirates, he said.

Bansal argued that the low allocation of finance to SMEs in the GCC was ‘perhaps a function of the market size and the percentage of SME companies in the GCC being low, relative to [the] wider MENA’.

Bansal also gave examples of initiatives in Saudi Arabia and Oman which he says are designed to foster SMEs and create a favourable environment.

“Saudi Arabia established the SME Authority to foster the development of these businesses. Projects from the SME Authority include MiSK, a non-profit foundation devoted to cultivating, learning and leadership in youth of Saudi Arabia,” he said.

“The private sector has also led to the emergence of a real funding ecosystem, with further plans of launching the SMEA Fund of Funds program in 2019. By 2030, the kingdom forecasts that SMEs share will be 35 per cent of GDP.”

He also cited the $100 million (US) acquisition of Kuwait-based food delivery app food delivery app Carriage by Delivery Hero as a success story of the strong ecosystem for entrepreneurs and SMEs in Kuwait, and, Bank Muscat’s Al Wathbah SME Department as being supportive of entrepreneurs in Oman.

The report said the MENA SME industry is currently dominated by non-GCC nations, which account for 66 per cent of the total MENA market. Citing figures from MENA Research Partners, it said the total MENA market was worth around $1 trillion per year. Of this, around $360 billion in generated in the GCC, but only around 26 percent of the GCC’s GDP comes from SMEs.

“Most notably, the GCC SME market presents a potential of $920 billion with 156 per cent growth in the next five years, employing 22 million people from the current level of around 17 million people employed.

“However, the growth could go even higher on the back of aggressive government support and increased flow of FDI due to various policies and institutions being put in place,” it concluded.

About Marc Mcilhone

Marc Mcilhone
Marc Mcilhone is ArabBrains' Editor - sourcing news and features content and overseeing the work of the site’s contributors. Marc’s work is informed by his technical background in architecture having worked for some of the UK’s leading practices on projects within the education, healthcare and housing sectors. Marc has a particular interest in how innovators are creating sustainable solutions that have a positive impact on people’s everyday lives. Please email press releases and news to:

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