From small beginnings: Encouraging the development of SMEs

The role of small and medium-sized enterprises (SMEs) is crucial in any economy. According to the International Finance Corporation (IFC), formal SMEs account for up to 45% of employment and up to 33% of GDP in emerging economies, while in high-income countries they account for 62% of employment and nearly 64% of GDP. Given the significant role that SMEs play in any economy, Abu Dhabi has placed the nurturing of this segment at the forefront of its development strategy.

The current policy regarding SMEs can be traced back to the early stages of the creation of the Abu Dhabi Economic Vision 2030, the emirate’s long-term economic development plan, which was published in 2008. While the economic priorities of that document acknowledged the importance of harnessing Abu Dhabi’s competitive advantages to create national champions, or large enterprises that provide a focal point for service clusters to develop, it also points out the historical vulnerability to economic shocks of countries that have overly relied on them as a means of economic growth. These include such adverse occurrences as the collapse of an individual industry, recessions in key export markets, or monetary crises.

Spreading The Risk

While there are numerous safeguards that can be separately taken against these issues, one policy that addresses them all is the diversification of the enterprise base to include a larger number of active SMEs. The Economic Vision 2030 strategy recognises, therefore, the need to spread risk and reduce the potential effects of shocks to the economy by expanding the SME sector, but it also identifies other advantages to adopting an SME-friendly stance.

Competition between a growing number of SMEs, as well as cooperation between businesses that constitute an SME cluster, tends to stimulate the types of technological advances that produce growth in high-value-added economic sectors, which can in turn spawn the next generation of national champions. Furthermore, burgeoning SME markets in other nations have demonstrated their ability to create more and better-quality employment opportunities, while, on the other side of the equation, the development of SMEs opens up new opportunities for the entrepreneurs, business owners and venture capitalists that are an integral part of a thriving economy.

From Theory To Practice

The single most significant tool by which the government of Abu Dhabi has sought to implement its SME strategy is the Khalifa Fund for Enterprise Development. Launched in 2007, the fund works to create a culture of investment and entrepreneurship among the young people of the emirate, providing a support system for new businesses that encompasses training, development, data and consulting services. In addition to these services, financing is also available for viable projects through a number of programmes. These include Khutwa, a microfinance scheme that offers loans of up to Dh250,000 ($68,050) for small enterprises; the Bedaya programme, which supports new SMEs with loans of up to Dh3m ($816,600);

Zeyada, through which early stage SMEs can apply for expansion loans of up to Dh5m ($1.4m); and Tasnea, a venture that places more emphasis on industrial projects requiring larger investments.

For each loan, the borrower must provide a down payment of 10% as a sign of their commitment to the project. Funds are lent at zero interest unless the amount exceeds Dh5m ($1.4m), in which case 3% annual interest rate is charged. The government’s commitment to the Khalifa Fund was underscored by its March 2011 decision to double the organisation’s capital from Dh1bn ($272.2m) to Dh2bn ($544.4m), which allowed the fund to expand the scope of its services beyond Abu Dhabi and into the other emirates.

The total volume of financing supplied by the Khalifa Fund has been significant, therefore, both to the economy of Abu Dhabi and that of the wider UAE.

Between its establishment in 2007 and the end of the first quarter of 2013 the fund has approved financial disbursements worth Dh856m ($233m) to 82 projects under the Khutwa programme, 295 projects under the Bedaya programme, 117 under the Zeyada programme and 10 under the Tasnea initiative. In the first quarter of 2013 alone, the Khalifa Fund provided finance for 69 projects, amounting to a total of Dh51.4m ($14m).

As well as nurturing smaller businesses, the government of Abu Dhabi is investing in education and training to develop the Emirati labour force and increase the participation of nationals in the workforce. “The creation of advanced training programmes and government initiatives to improve human resources services are necessary steps towards establishing a technically skilled local workforce,” Ali Saeed Al Ameri, the chairman and CEO of Al Shoumoukh Group, told OBG.

Private Sector Interest

Abu Dhabi has also demonstrated considerable success in involving the private sector in its drive to boost the role played by SMEs in the economy. A salient example of this is the SME Congress & Expo held in the UAE’s capital in December 2013. The event, organised by UK-based knowledge provider Informa, was intended to provide a platform for businesses, organisations and entrepreneurs to build relationships, as well as provide a learning arena for individuals and entities involved in the SME segment. A series of training sessions and workshops offered over the three days of the event tackled some of the key issues facing Emirati start-ups and small businesses, such as the question of raising funds, marketing, regulatory demands, franchising matters, business planning, the effective use of social media, budgeting, fostering innovation, accounting and managing cash flow, and information and communications technology.

The strategic partners of the event included some of the bodies most involved with the development of Abu Dhabi’s economy, such as the Khalifa Fund, the Abu Dhabi Department of Economic Development and the Abu Dhabi Chamber. Private sector funding, meanwhile, came from some of the UAE’s foremost corporates, including Etisalat and Etihad Airways, as well as regional employment specialists, such as


However, while private sector involvement in providing platforms for SME capacity building is an important part of the emirate’s policy for SME development, the question of funding remains the preeminent concern for many observers. A 2011 survey of over 130 banks in the Middle East and North Africa region undertaken by the World Bank in conjunction with the Union of Arab Banks showed that only 8% of their credit is extended to SMEs. In the GCC this figure falls to 2%, a scenario that has prompted the IFC to describe the question of access to finance as one of the greatest challenges facing SMEs in the region.

With few exceptions, banks in Abu Dhabi, as well as the wider UAE, have traditionally grown their loan books with the big-ticket deals that the nation’s infrastructural expansion – both in terms of urban growth and the hydrocarbons sector – have demanded. However, the combination of an altered economic environment in the wake of the global credit crisis and a new regulatory curb on exposures to government-related entities (see Banking chapter) have made the extension of credit to Abu Dhabi’s SMEs a more tempting option.

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The Report: Abu Dhabi 2014

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