Interview: Khaled Al Aboodi
What international experiences can be applied to Saudi Arabia’s current economic challenges?
KHALED AL ABOODI: Shifting the Saudi economy away from its dependence on hydrocarbons presents an immense but not insurmountable challenge. By focusing on more innovation-intensive goods and services, other states have successfully created fully diversified and internationally competitive economies. History shows that firm political commitments, consistent policy and substantial financial resources tend to be prerequisites for successful diversification. The good news is that the economy is handling low oil prices quite well, as the government embarks on a wide range of structural reforms to ensure long-term development under Vision 2030.
Global best practices should be applied to level the playing field for the private sector, empower women and youth, target fiscal and monetary measures to support reform, and develop efficient governance.
How can SMEs gain better access to finance?
AL ABOODI: While bank financing remains crucial, there are concerns that credit constraints are the new normal. It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs. The ratio of firms in Islamic Development Bank countries borrowing from financial institutions is 15% lower than the world average, indicating they use more internal financing for their capital needs. In 2015 the Saudi Arabian General Investment Authority released a new Companies Law in part to promote SME development, reducing the capital and number of shareholders required to form a joint-stock company, and allowing, in some cases, one person rather than two to form a corporation. ICD has been more active in setting up funds to improve SMEs’ access to term financing and equity investments. In 2014 the ICD set up the first SME investment fund in Saudi Arabia, an SR1bn ($267m) quasi-equity and debt, sharia-compliant fund to invest in SMEs with high growth potential.
What tools and regulations are needed to activate venture capital (VC) and other funding sources?
AL ABOODI: Saudi Arabia is one of the largest markets in the region in terms of wealth and population, and Vision 2030 aims to reform the economy for a new generation, encouraging innovation and improving regulation. VC is one of the most powerful ways to enable entrepreneurial innovation.
To this end, ICD and King Abdullah University of Science and Technology (KAUST), in collaboration with Anfaal Capital, agreed recently to establish a Saudi-focused VC fund to foster the development of the domestic VC market. With KAUST’s expertise in new technologies and ICD’s in fund management, we will fund high-tech start-ups located in the Kingdom, and lead early-stage financing by local investors and international venture capitalists. The fund will seek out innovative VC opportunities and provide smart capital by not only acting as a financial investor, but also by providing strategic guidance and operational support.
In terms of bankability, where do SMEs fall short?
AL ABOODI: Banks find it difficult to lend to SMEs in the current market. First, individual SME loans are much smaller than loans to corporations. Second, SMEs generally do not have well-staffed finance departments, appropriate record keeping and up-to-date technology, so most will never be able to provide the documentation required. Third, SMEs generally do not have adequate collateral or the credit history to meet the established criteria developed for corporate clients. Also, accepting SME risk can be difficult. While improvements on the policy and the supply side are needed, SMEs also need to improve corporate governance, record keeping and transparency; engage qualified finance and accounting professionals; improve financial discipline; and employ modern operating procedures. Nevertheless a bank accustomed to “A”-rated borrowers will still find it difficult to accept “B”-rated credit applications from SMEs.
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