Released in January 2024, Qatar’s Third National Development Strategy 2024-30 (NDS-3) aims to bolster the role of the private sector in driving economic growth, shifting away from unsustainable government-led expansion. Small and medium-sized enterprises (SMEs) are identified as key players in this shift, with a projected compound annual growth rate of 36% in SME contributions to the non-hydrocarbons GDP by 2030. The strategy anticipates increased private sector funding opportunities, calling for enhancements in the financial services sector to diversify funding options, including bank credit to SMEs and access to capital markets.
In alignment with the NDS-3’s goals, the Qatar Central Bank (QCB) released the Third Financial Sector Strategic Plan and plans to develop special financing programmes to support SME growth. This includes the implementation of mentoring and coaching programmes on financing, digital adaptation and green transition. The plan also encourages private sector and SME issuances, and aims for a 7% credit to SMEs as a percentage of commercial credit.
Baseline
The landscape of SME financing in Qatar, as outlined in the 2021 data released by Qatar Development Bank (QDB), Qatar’s main public development bank, paints a comprehensive picture of a dynamic and evolving sector. In terms of banking clients with ongoing credit facilities, micro-enterprises accounted for the largest share at approximately 63%, demonstrating the substantial engagement of these enterprises in the financial sector. Small-sized companies followed at around 27%, with medium-sized companies making up the remaining 10%. This distribution reflects the active participation of smaller businesses within the banking sector. However, when considering the value of credit applications, medium-sized companies dominated, accounting for approximately 67% of the total value. This significant disparity underscores the higher financial requirements of medium-sized businesses compared to their smaller counterparts, which accounted for 28% of submissions.
Credit
Qatar has credit guarantee systems in place that help reduce the risk in lending to SMEs. These provide guarantees to banks and other lenders, enabling them to extend credit to entities that may not meet traditional collateral requirements.
That same year the majority of credit requests submitted by SMEs were directed towards securing working capital, constituting 37% of all applications. This trend highlights the need for liquidity management among SMEs. Additionally, requests for growth and expansion represented 21% of the total, up from 12% in the previous year, suggesting a rising ambition for growth among these businesses. Notably, 5% of requests were for starting a new business.
The outstanding credit extended to SMEs in 2021 was approximately QR20.3bn ($5.6bn), representing around 4% of the total private sector credit. This figure marked a decrease from 2019 and 2020, where SMEs’ credit balance represented 4.6% and 4.8% of total private sector credit, respectively. This downward trajectory could signify a shift in SME financing strategies, or a response to the more cautious lending atmosphere amid the challenges posed by the Covid-19 pandemic and its aftermath.
QDB is at the forefront of lenders, holding around 25% of the credit share, with the UK’s HSBC, and local financial institutions QNB, Dukhan Bank and Al Khaliji trailing behind. In 2023 QDB supported SMEs by providing QR1.2bn ($329.4m) in financial guarantees. The bank has been instrumental in empowering over 1155 SMEs via direct and indirect lending, as well as investing in more than 140 start-up ventures.
Future Enablers
The approval of the Law on Mortgage of Movable Assets in 2021 marked a crucial step in facilitating credit to SMEs. Moving forwards, Qatar can pursue various approaches to achieve national goals, including refining financing frameworks and platforms for SMEs, embracing financial technology (fintech) solutions, and providing tailored training and non-financial support.
SME funding platforms serve as intermediaries that match SMEs with an array of alternative finance providers, tailored to their distinct lending appetites. Predominantly privately owned, some platforms benefit from public-private collaborations. While the focus of these platforms leans towards debt provision due to its lower risk and quicker return on investment, some also cater to equity financing. These platforms could significantly broaden the range of financing options available to SMEs in Qatar.
Significantly, in 2023 QCB issued its inaugural regulation on loan-based crowdfunding, which is expected to expand financing avenues for SMEs, and help them overcome challenges related to growth and expansion. Apart from traditional bank lending, capital markets could play a pivotal role in diversifying capital options. An illustrative example is the collaboration between the Qatar Stock Exchange (QSE) and QDB to introduce a financial programme aimed at promoting listings on QSE’s Venture Market. This programme offers competitive profit rates, flexible repayment terms and covers advisory fees.
Fintech
Fintech firms represent another promising avenue for enhancing SME financing. By fostering competition among providers of SME financial services, fintechs can help drive more favourable financing conditions for relevant businesses. Moreover, non-traditional fintech lenders have shown a positive impact on small business growth and investment, enabling such enterprises to boost their assets, employment and sales. This is particularly beneficial for SMEs that have previously been turned down by conventional banks. By offering an alternative to traditional bank financing, fintech lending can reduce the risk of small businesses being overly exposed to banking shocks that could limit their access to financing and hamper their growth.
With QCB eyeing increased support to fintech, it is likely that local SMEs will benefit from an expansion of non-traditional credit options enabled by fintech. QDB’s Qatar Fintech Hub has played a significant role in nurturing Qatar’s fintech industry, graduating 57 start-ups with a cumulative valuation of $500m since its inception in April 2020.
Qatari banks are showing increased interest in supporting the SME ecosystem through training and non-financial assistance at various stages of business development. For instance, the Qatar Research, Development and Innovation Council, in partnership with QDB, successfully completed the second and third rounds of the Strategic Product Management Bootcamp for SMEs in October 2023. This programme seeks to equip SMEs with the necessary skills and knowledge to succeed in a competitive market. Participants are trained in various areas of product management, such as design thinking, concept assessment, business case development, product launch planning and market research.
A similar approach is being pursued in QDB’s collaboration with Hamad Bin Khalifa University under the Education City Innovative Entrepreneurship Programme, which aims to provide support, training, funding and mentoring to entrepreneurial members of the Qatar Foundation’s community. The goal is to commercialise business ideas that align with the priorities outlined in the NDS-3.
Prospects
The state of SME financing in Qatar is marked by a high level of engagement of microand small businesses with the financial sector, a significant credit requirement among medium-sized companies and a prevailing need for working capital. Despite the decline in 2021 in the value of accepted credit applications and outstanding credit, the sector remains dynamic, underscored by increasing requests for growth and expansion.
While QDB and its partners have been making strides by providing financing and capability development for SMEs, there is a recognised need to broaden and customise the range of financial instruments available to them, including both debt and equity. Expanding these offerings could help address the diverse needs that SMEs face at different stages of their business development, from seed and start-up, to growth and maturity. QDB is expected to remain the primary force behind these efforts in the short to medium term; however, economic interest and policy momentum could result in increased involvement from other banks.
If banks start to become more involved in lending to SMEs, Qatar could serve as a success story, demonstrating how development finance institutions can collaborate with commercial banks to boost lending and reduce loan interest rates. This could be demonstrated through measures such as insurance backed by development banks and regulatory support bolstered by government incentives.
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