Supporting the development of Oman’s small and medium-sized enterprises (SMEs) is regarded as a key method for boosting private sector employment levels and direct Omani involvement in the economy. With these goals in mind, government policy is being implemented to provide SMEs with additional funding and expertise, as well as to grant them wider access to government tenders.
According to some estimates, more than 90% of all registered firms in the Sultanate fall into the SME category, though their combined contribution to GDP is only around 15%. Most of these small-scale businesses are rated by the Public Authority for Social Insurance as being micro-enterprises, with 78% of companies in Oman employing five people or fewer, between them accounting for just 10% of total employment nationwide.
One route that authorities have identified as key to supporting SME growth is giving small businesses a greater role in the large-scale infrastructure and industrial development programme currently being embarked upon. While few SMEs are in a position to bid on major projects such as the national rail network, new petrochemical plants or social support programmes such as state housing developments, SMEs are being encouraged to play a part in such schemes through the provision of services or components, or as subcontractors to larger companies.
As the official entity that awards the contracts for many government projects, the Tender Board has called for at least 10% of all work on such projects to be carried out by SMEs, a requirement that will see larger contracting firms farm out portions of contracted activities to their smaller counterparts. SMEs will also be in line to benefit from a planned requirement to have higher levels of locally produced material used in projects contracted by the state.
Currently, many of Oman’s SMEs are not in a position to bid on state contracts or provide services or materials at the quality-level required by government projects. One problem cited by SME operators has been gaining access to adequate capital to fund expansion, an issue also addressed by the government.
Late last year, the Central Bank of Oman issued a regulation stating that a minimum of 5% of commercial bank lending should be directed to SME clients. The new measure, according to central bank estimates, will open up a funding pipeline of more than $2.6bn a year for SMEs to tap into, rather than the $1bn that they are currently able to access. This additional funding will allow smaller firms to expand and meet the requirements of bidding on larger jobs.
While the government has put in place a range of support mechanisms for SMEs, the private sector is also backing some measures, according to Khalifa bin Said Al Abri, the acting chief executive officer of the Public Authority for Small and Medium Enterprises Development (PASMED). While the state can create a sustainable environment for small businesses, the firms themselves must make the most of the opportunities presented to them. Alhough PASMED helps nurture SMEs, its ultimate aim is to foster independent private sector growth.
“It is important to drive home the point that the idea is to teach SMEs how to do business, not to do it for them,” Al Abri told OBG. “Government cannot do everything – SMEs need to do the work too, and realise their potential in the developing economy.”
Risk management needed
Underpinning the efforts of SMEs to realise their potential are Oman’s banks, which will be providing much of the funding necessary to sustain business growth. Lloyd Maddock, the CEO of Ahli Bank says that is critically important that the banking sector provides bespoke service delivery to SMEs, in providing both funding and non-financial inputs, such as guidance on the development of business models, financial planning and accounting. Lending to SMEs, in particular new start-ups, can be categorised as comparatively higher credit risk, and banks consequently need to adopt appropriate risk analysis policies, compared to established credit models for larger, established corporate borrowers.
In 2014, the banking sector will seek to allocate 5% of total assets to the SME sector, and modest progress is being achieved with the achievement of a circa 2.7% ratio as at end-April. However, this is not evenly distributed amongst the banks.
Maddock told OBG, “In supporting the SME sector, the banks must plan for mutually beneficial, long-term sustainable growth, whilst being mindful of the potential risks of over-funding and the potential for non-performing loans to increase. Banks, in addition to other industry players, are already being pro-active in providing guidance to SME entrepreneurs, for example by hosting development programmes, training courses and industry seminars. This will ensure a win-win scenario going forward.”
This need to develop business skills among SME owners is a very real one, with up to two-thirds of such enterprises closing their doors within three years of setting up shop. Unless such failure rates are reduced, this level of bankruptcy could have a flow-on effect onto large-scale projects where SMEs have been contracted to supply goods and services.
Despite these concerns, the Omani economy’s strong growth prospects and the improved support mechanisms for SMEs should help minimise risks and ensure that the country’s smaller businesses are able to reach their full potential.