Lending a hand: Struggling small businesses benefit from reforms

Small and medium-sized enterprises (SMEs) are a key contributor to the economies of both Sharjah and the UAE as a whole. Approximately 54,000 of the UAE’s 350,000 smaller businesses are based in the emirate, accounting for 86% of the private sector workforce. According to the Ministry of Economy, the segment further accounts for around 60% of federal non-oil GDP, a figure the authorities wish to raise to 70% by 2021. Meanwhile, Sharjah is seeking to position itself as a regional centre for smaller businesses.

CHALLENGING TIMES: The segment has been facing challenges in recent times as a result of factors including the drop in international oil prices in 2014 and 2015, which has resulted in a slowdown of major projects. This in turn has led to a rise in bankruptcies and non-performing loans, which have made local banks that were previously keen to boost their levels of SME credit now more reluctant to lend to the segment.

“SMEs are the backbone of any economy and there is a need to support the sector. However, local SMEs suffered at the end of 2015 due to factors such as the fall in oil price,” Ahmed Saad, deputy CEO of Sharjah Islamic Bank, told OBG. He said there was a lot of competition for SME business until recently, in part because of the large number of banks in the UAE, but that since 2015 banks are no longer proactively chasing SMEs for business. “There will be tighter control from banks in regards to lending to the segment in the future given these recent problems, making it harder for smaller firms to get financing,” he said.

The situation in regards to financing the sector is similar across the entire UAE, according to Anthony Murphy, CFO and head of strategy at United Arab Bank (UAB). “When I first arrived in the UAE in 2010 the focus across many banks was to enter the SME sector, given the belief that the segment was underbanked. Given the economic backdrop and ever-changing regulatory environment, a number of banks, including UAB, are re-evaluating their exposure, with some reducing their SME business,” he told OBG. (Xanax) Indeed, UAB itself is in the process of eliminating the SME business to concentrate on its traditional specialities, namely corporate banking. “Financing is definitely a challenge for SMEs at the moment, as banks have been pulling back funding because of a sudden blip in delinquencies,” said Tushar Singhvi, vice-president for corporate development and investments at Sharjah-headquartered holding firm Crescent Enterprises. He added that banks have been lending to the segment at high interest rates that are not sustainable.

ALTERNATIVE CHANNELS: While he thought the retrenchment in SME lending by banks was a temporary one, Singhvi argued that there was also a need to develop other sources of financing for the segment, like non-bank private investment, which he said would leave SMEs better off than high-interest bank loans. “Currently there is a gap in investment financing in that you have angel investors looking at high risk, early stage start-ups, and private equity firms looking at big companies, but a gap in between for investments of around $5m and $20m,” he told OBG, calling for a combined effort from both the government and private sector to promote such investment.

BANKRUPTCY LAW: One development set to improve the availability of such financing, and to boost the UAE’s SME sector in general, is a new federal bankruptcy law that was implemented at the end of December 2016.

Prominent amongst the changes included in the law is the abolition of a previous criminal offence of bankruptcy by default. This rule had been applied to traders unable to pay debts within 30 days of them coming due and who had failed to apply to declare bankruptcy. While debtors who are unable to pay debts in the time-frame are still required to declare themselves bankrupt and can be subject to a disqualification order if they do not, failure to do so is no longer a criminal offence. The previous law was widely regarded as encouraging debtors unable to pay their debts to flee the country