For GCC states seeking to diversify their economies away from a reliance on hydrocarbon revenues, the development of a vibrant small and medium-sized enterprise (SME) sector is a strategic priority. Saudi Arabia shares this ambition, but holds an advantage over many of its neighbours in that SMEs already account for around 90% of the country’s registered businesses and 60% of total employment, according to a recent report by Aljazira Capital. Nevertheless, the Kingdom is keen to enhance the role of SMEs in the economy – a task that assumes greater importance in the context of the segment’s performance relative to its global peers. Indeed, despite the prominent position of small businesses in the Saudi economy, their contribution to GDP (about 33%) is modest in comparison to the US (50%), France (56%), Spain (57%) and Japan (64%).
SHORTCOMINGS: Regulatory hurdles, taxation issues and unfavourable Customs regimes are all frequently adduced as potential hindrances to the expansion of the SME sector in the MENA region, but perhaps the main concern is access to finance. A recent survey carried out by the Union of Arab Banks and the World Bank revealed that only 8% of lending activity in the MENA region is directed toward SMEs and that among GCC states the SME lending rate is as low as 2%. According to the International Finance Corporation (IFC), Saudi banks are typical of the Gulf region in this regard, with 2% of loan books taken up by credit facilities to SMEs. While such a low percentage might be expected in small, corporate-dominated economies such as Qatar, the trend is a surprising one for Saudi Arabia, given that SMEs play such a structurally important role in the economy. To this end, encouraging the domestic banking sector to increase its lending activity to small businesses has become a key concern for the authorities.
KAFALA: The principal means by which the government has sought to boost lending to small businesses is the SME Loan Guarantee Programme managed by the Saudi Industrial Development Fund. Better known as the Kafala programme, the initiative was set up in 2006 by the Ministry of Finance in conjunction with local banks to enable SMEs to better participate in the growth of the national economy and provide new job opportunities for the Kingdom’s workforce.
At the time of its inception, the programme set out to increase the number of SMEs in the Kingdom, as well as to allow existing SMEs to improve their efficiency and expand the scope of their operations, absorb the surplus liquidity of the banking sector and channel it towards the SME sector, and to familiarise small business owners with the local banking process and the advantages offered by it. The performance of the scheme to date has been encouraging. By June 2011, a total of 1390 SMEs had benefitted from loans secured under the scheme, with about SR2bn ($533.2m) dispersed. Moreover, in the years since its creation it has become the most important point of contact between Saudi banks and the domestic SME segment.
In addition, the events of the Arab Spring have reinforced the need to boost the role of the non-oil economy and support job opportunities in the region. The Saudi authorities have turned to Kafala as a possible means to this end. In the summer of 2011 the authorities sought to broaden the reach of the scheme by increasing the portion of the loan covered by a guarantee to 80% of existing projects’ finance, as well as extending the maximum value by SR100,000 ($26,660) to SR1.6m ($426,500). The project has also set a target of guaranteeing loans for some 10,000 SMEs over the following 10 years.
TODAY’S PROGRAMME: The government’s focus on the Kafala programme as part of its economic diversification strategy is a policy framework far more effective than most observers anticipated at the time of its launch. Indeed, in 2006 the scheme’s administrators issued 51 loan guarantees, a figure that has since risen to 7280 loan guarantees, amounting to SR3.59bn ($957m), as of year-end 2013. Moreover, the activities of the programme have expanded to encompass areas such as training and awareness campaigns as well as workshops for SMEs in cooperation with organisations including the World Bank.
“Establishing the Kafala programme definitely represents a qualitative leap in terms of bridging the gap in the financing system available for SMEs today,” Osama bin Abdurrahman Al Mubarak, director of the Kafala programme, told the local press in early 2014. “The programme stands as one of the most successful forms of partnerships and cooperation between a governmental body and the Saudi banks,” he said.
INCREASING APPETITE: While lending to SMEs in the Kingdom has tended to be overlooked as too expensive in terms of risk and human resources (HR), increasing competition in the banking sector and the altered economic backdrop following the 2008 global economic crisis have both served to shift sentiment surrounding SME credit into positive territory. To this end, all local lenders now maintain dedicated SME departments, although their strategic approach has varied. Some, such as Saudi Hollandi, have established their SME units as part of their retail operations, while others have chosen to place them within their corporate divisions. However, across the industry there is a common awareness that the days of downscaling corporate instruments and applying them to SME lending or, conversely, simply extending retail-focused products into the SME segment, are over. “We are truly going for the SME market and not just adapting standard corporate credit assessment models. It is more about market and merchant knowledge, and not just about financial statement assessments,” Nizar A Al Twaijri, regional manager at the Arab National Bank, told OBG.
PROSPECTS: As a result of Kafala and the growing enthusiasm of local banks for exposure to smaller companies, the outlook for SME lending in the Kingdom is a positive one. Notwithstanding, significant momentum has also come from the establishment of the Commercial Credit Bureau in 2009, which was the result of a joint operation between the Saudi Arabian Monetary Agency (SAMA) and Saudi banks. The new body has brought greater transparency to the sector, allowing banks to better assess credit risk related to the previously underdeveloped SME segment. Lending to SMEs is also being encouraged by the IFC, which has previously worked with domestic banks to provide finance and advisory services to smaller businesses. SAMA, meanwhile, continues to oversee the sustainability of lending in segment, supervising the quality of the banks’ SME units, particularly with regard to their internal rating systems and automated procedures.
However, key challenges remain, specifically that the financial infrastructure underpinning SME lending is new. In addition, specialised SME management skills are in short supply and will continue to present an HR challenge in the short term, while financial transparency, although improving, is still a concern for most lenders. Moreover, a lack of collateral within the segment threatens to slow loan book growth. Nevertheless, greater sophistication in the sector suggests that these issues are gradually being overcome, with SMEs increasingly featuring on the balance sheets of Saudi banks.
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