Economic View

On supporting the development of small businesses

In which areas did small and medium-sized enterprises (SMEs) face the most pressing pandemic-related challenges, and how were those issues mitigated?

IBRAHIM AL RASHID: The pandemic created an unprecedented level of disruption and uncertainty for SMEs, particularly during the second and third quarter of 2020, and many had to cease operations completely for an extended period of time. With cash flow difficulties becoming prevalent, many SMEs were at risk of closure since they are generally more vulnerable to short-term financial stress than larger corporations.

To help companies and individuals face the multifaceted challenges arising from the pandemic, the National Development Fund deployed SR22bn ($5.9bn), of which SR12bn ($3.2bn) was allocated to the SDB. This allowed us to double our capital for social loans to support struggling families – some of which saw their incomes cut off or reduced overnight – as well as to increase business lending from SR1bn ($266.6m) to SR1.7bn ($452.2m), targeting over 9000 SMEs. Although these financial facilities were mostly directed to micro-businesses and well-established SMEs, we decided to extend them to start-ups, provided the capital would be used for supply services and goods necessary to the fight against the pandemic, such as logistics and food distribution. Beyond this, deferments of loan repayments by the banking sector were introduced, benefitting more than 12,000 SDB clients.

As SMEs are a pillar of Saudi Vision 2030, the public budget has extended the same level of financial support to SMEs and vulnerable segments into 2021. In this regard, public banks will have an important responsibility to ensure financial sustainability. In the case of the SDB, its operational independence – granted in 2019 – reinforces accountability and incentivises financial discipline to manage operational expenses and keep a healthy balance sheet.

What is the role of the micro-business segment in Saudi Arabia’s economic development, and how is this segment being supported?

AL RASHID: Micro-businesses are an often overlooked segment of the economic fabric, despite it generating a notably positive social impact, particularly in relation to the economic empowerment of women. However, Saudi Arabia is increasingly paying attention to the segment, with SR200m ($53.3m) budgeted for 2020 and roughly the same amount for 2021. 

By 2020 the SDB had successfully provided financial support to over 100,000 micro-businesses, partly thanks to the application of the apex model. This model relies on empowering local NGOs to channel the funds and resulted in the SDB training around 140 charities on how to identify and assess potential beneficiaries, as well as to disburse payments and manage debt collection. It should be noted that the share of non-performing loans in this segment is below 3%. Beyond financial support, a number of non-financial programmes have also been added to facilitate the improvement of micro-businesses in terms of production quality and market access.

How is social finance evolving in Saudi Arabia, and to what extent is this evolution reflected in the SDB’s performance and strategy?

AL RASHID: When the Saudi government established the SDB and the first social funds in the early 1970s the focus was to directly support families by uplifting their economic standards through social loans, sometimes at zero cost. This approach was maintained for four decades. However, over the past decade, more emphasis has been placed on loans to help individuals establish and develop their businesses in order to achieve self-reliance. As a result, in 2020 the SDB reached a milestone: for the first time the value of business-oriented loans was higher than that of social loans.

Beyond the relative weight of our portfolio, efforts are being directed at stimulating the growth of the SME segment at large, prioritizing companies that add value to business-to-business relations, articulating value chains and creating quality employment in high-potential sectors. This approach has yielded positive results, fostering organic grassroots growth in sectors such as solar power generation, with the success of Medina as a case in point. This is setting the course for the SDB to expand its offering of business-oriented loans and support to micro-businesses in the coming years.