A key component of Saudi Arabia’s continued economic diversification strategy calls for strengthening the role of the most prolific segment of the private sector – small and medium-sized enterprises (SMEs). Already growing at a healthy rate, SMEs can provide valuable employment opportunities for a rapidly growing and young population, improve productivity and help broaden the economy. As of 2012, SMEs accounted for one-quarter of the country’s GDP, provided 63% all of employment and made up 98% of all enterprises, according to business intelligence provider Zawya.
But for all its contributions, the SME sector is still restrained by a variety of factors, including financial, training and managerial ones. Seeking to unleash the full potential of the private sector, the government has been working with the private sector to develop solutions that will lead to greater participation by commercial banks in SME financing. These efforts include the implementation of new measures over the past decade in an effort to free up financial resources for the sector by offering loan guarantees, increasing transparency and instituting ratings systems.
One such programme designed to spur on a new wave of liquidity is the Kafala programme, managed by the Saudi Industrial Development Fund (SIDF) in cooperation with local commercial banks. Kafala opens the financial taps by having the SIDF guarantee up to 80% of loans of up to SR2m ($533,000) issued to SMEs by commercial banks. In 2011 the programme approved a record 1208 loan guarantees, up 55% over the 777 issued the previous year. These translated into SR1.29bn ($343.7m) in commercial loans to SMEs, up 79% over the SR716m ($190.8m) in 2010. Over the six years of the programme, the SIDF has issued a total of 3095 loan guarantees to 1991 SMEs for a total of SR3.07bn ($818.1m). Contracting businesses took the most advantage in 2011 and qualified for 1494 guarantees (accounting for 48% of the all loans) totalling SR602m ($160.4m). This was followed by the services sector, which accounted for another 21% of loans at 652 worth SR314m ($83.6m). These were followed by industrial businesses with 546 loans (18%) worth SR259m ($69.02m), the commercial sector with 304, medical at 66, education with 24, agricultural with seven and entertainment with two.
In addition to the SIDF, the Saudi Credit & Savings Bank initiated a new lending programme specifically for SMEs in September 2012. The bank will offer loans ranging in value from SR300, 000-8m ($79,950-2.13m) and cover varying amounts of a project’s financing depending on the value of the loan.
In a bid to boost SME development, the Taqeem rating system was created in February 2012. In establishing the new credit assessment tool, the state hopes to further relieve some of the reticence commercial banks have in lending to SMEs by increasing transparency and lessening risk. Developed in coordination with global credit ratings agency Standard & Poor’s and the Saudi Credit Bureau (SIMAH), Taqeem will collect financial, economic, administrative and strategic information on companies so that loan officers may better assess risks.
In May 2012 SIMAH CEO Nabeel Al Mubarak stated that the Taqeem project had targeted some 800,000 firms for participation at a workshop at the Jeddah Chamber of Commerce and Industry. Of these firms, 67% were categorised as SMEs and 15,000 as corporate firms. In its initial stages the programme is hoping to qualify at least 20,000 SME projects. In spite of the recent progress in terms of increased access to financing, the SME sector still faces a number of challenges. Some of these, such as need for training and education programmes to bring skills and other competencies up to international standards, are already under way through educational reform and capacity building efforts and business incubators. Additionally, the state’s strategy of increasing the number of nationals in the private sector, Saudiisation, is under way. Whilst no single strategy alone will offer a solution, it is hoped that the combination of all of them will go a significant way to increasing the private sector’s contribution to GDP.
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