In an economy dominated by hydrocarbons, there is no doubt that the big business in Saudi Arabia is oil, but the Kingdom is also home to 1.8m small and medium-sized enterprises (SMEs), according to the International Finance Corporation (IFC).

The role of SMEs in promoting diversification, innovation and employment is recognised globally, and efforts to enhance the sector are common throughout GCC member countries, where the reliance on hydrocarbons has mitigated the need for SMEs in the past. As has been done elsewhere in the Gulf, the sector was specifically highlighted in the Kingdom’s 2010-14 development plan as a driver of economic diversification. Saudi Arabia is keen to enhance the role of SMEs in the economy, but relative to other economies around the globe, the Kingdom’s small businesses contribute a smaller share of total GDP. In the Saudi economy, their contribution to GDP is about 33%, compared to the US (50%), France (56%), Spain (57%) and Japan (64%).

Definitions of small, medium-sized and micro-enterprises vary, with some government agencies, such as the Saudi Arabian General Investment Authority, measuring numbers of employees, others assessing capital assets and some banks paying more attention to turnover. Overall, a small business in Saudi Arabia is one that employs fewer than 60 people and has less than SR5m ($1.3m) in assets, while a medium-sized company is one that employs fewer than 100 people and has access to between SR5m ($1.3m) and SR20m ($5.3m). One of the banks that offers specialist SME services defines an SME as a company with an annual turnover of up to SR30m ($8m). This compares to the European Commission definition of SME size, under which a micro-company employs fewer than 10 workers and has a turnover of less €2m, while a small business has fewer than 100 staff with turnover of less than €10m, and a medium-sized enterprise has a workforce smaller than 250 and an annual turnover of less than €50m.

CREDIT: The IFC has helped to improve access to credit for smaller firms in Saudi Arabia and has encouraged three banks to develop products tailored to the SME sector. Riyad Bank, Saudi Hollandi Bank and Al Rajhi Bank all expanded their offerings. The IFC also helped Riyad Bank introduce a Saudi Arabian version of the IFC’s SME Toolkit that helps small business owners improve their managerial and accounting skills, and it also worked with Samba Financial Group to train SMEs and micro-enterprises through the Business Edge programme. However, Walid Al Murshed, the IFC’s head for Saudi Arabia, emphasised the need to run training courses within the banks themselves.

“It is important that banks offer a different product for SME customers and train their staff to work in that section,” Al Murshed told OBG. “If I am working in the corporate banking department and I am trying to ensure that I meet my target for loans, I will naturally prefer to arrange financing for bigger companies, perhaps SR20m ($5.3m) and above, and so if I am in that part of the bank I will not want to be concerned with small businesses. Every bank needs a separate department targeted just at SMEs; then it will see results and businesses in the SME sector will become valued customers.”

KAFALAH & TAQEEM: The government is also playing its part in attempting to stimulate loans to SMEs as part of its long-term commitment to building a more diversified economy. The Kafalah scheme offered by the Saudi Industrial Development Fund (SIDF) offers financial institutions a guarantee of up to 80% of any SME loan to mitigate the risks of dealing with companies in the sector.

According to Abdulrahman Mutabagani, the head of the business banking group at Banque Saudi Fransi, told OBG, “There was a problem in the past in that some banks did not consider SMEs to be a target market. This attitude is changing and we are working to make SME lending one of our pillars of growth. The Kafala programme has been useful in this regard.”

When it was created, the programme aimed to increase the number of SMEs in the Kingdom and help existing SMEs to expand. The effort was designed to both nurture a greater culture of small businesses, while also siphoning excess liquidity from the banking sector and channelling it to SMEs. To date, the performance of the programme has been encouraging. As of June 2011, a total of 1390 SMEs had benefitted from loans secured through the programme and roughly SR2bn ($533.2m) had been dispersed.

Importantly, in the years since Kafalah has been running, it has become a central point of contact between the Kingdom’s banks and its SMEs. This is a particularly positive development, considering that, according to the IFC, only 2% of the aggregate Saudi loan book comes from SME lending.

Eligibility in the Kafalah programme is open to any legal private enterprise, with the exception of companies buying and selling goods without adding extra value and brokerages. The guarantees last for up to seven years and can be worth up to SR1.6m ($427,000). According to local media reports, guarantees worth a total of SR3.59bn ($957m) had been provided by the end of 2013, while loans extended by banks had amounted to SR7.18bn ($1.91bn). SMEs have also been targeted by a special credit rating system called Taqeem, which is offered by the Saudi Credit Bureau. Taqeem, which was introduced in February 2012, enables banks to access reliable credit ratings data to evaluate applicants.

GROWING POTENTIAL: In real terms, the non-oil private sector grew by 5.5% in 2013, with the private sector contribution to GDP reaching 58.7%, according to figures from the Saudi Arabian Monetary Agency. Policymakers hope that SMEs will play an ever-increasing role in this growth story. However, the sector can be difficult to monitor and influence. While 90% of all registered businesses in Saudi Arabia are classified as SMEs, Mohammed Albelaihed, the director of the SME Centre at the Council of Saudi Chambers (CSC), told local media he estimates that approximately 71% of those are operational and 85% of all listed businesses are single-proprietor entities. In an October 2013 presentation on SMEs in GCC countries, economic researcher Ashoor A Ashoor suggested that the practice of tasattur, where business are registered in the name of a citizen in return for a monthly fee but are actually operated and financed by expatriate workers, makes it harder for business improvement messages and policy initiatives to reach and impact entrepreneurs.

RED TAPE: While the government is working to expand opportunities in the sector, a Riyadh Chamber of Commerce and Industry survey found bureaucracy was the most significant obstacle facing SMEs, with over 65% of respondents suggesting it was a problem, followed by access to finance (59%) and workforce-related issues (44%).

Saudi Arabia is ranked 26th in the World Banks’ 2014 “Doing Business” report, though it has slipped four places in the list of 189 countries. Its ranking for starting a business fell from 78th in 2013 to 84th in 2014, from 53rd to 55th for getting credit and from 12th to 14th in registering a property. However, while this survey allows for comparisons to be made between countries, it is based on results for a relatively small group of companies. The methodology restricts data collection to businesses that are 100% owned by a citizen of the country and, in the case of Saudi Arabia, are based in Riyadh. Only a third of the 101 SIDF loans awarded to SMEs in 2012 went to companies based in the capital. The country is additionally ranked 20th out of 148 economies in the World Economic Forum’s “Global Competitiveness Report 2013-14”. In Saudi Arabia 47% of SMEs are focused on the commercial and hotel sectors, while 27% are in construction, 12% in industry, 6% in social services and 8% in other sectors.

RISKY BUSINESS: The perceived risks of working in the private sector, or of starting a business in general, when compared to the reliable salaries, job security and benefits provided by the public sector, mean that the majority of Saudi workers shun enterprise activities. More than 65% of Saudi employees work for the state, while 87% of the private sector workforce is drawn from the pool of expatriate labour that constitutes a third of the population. It is estimated that SMEs employ 4.5m people, but that most of these are foreign workers. Saudiisation policies, including the Nitaqat quota system, could have an impact on these proportions, but stimulating entrepreneurial activity among its own citizens is also one of the policymakers’ objectives.

It also appears that the government hopes to inspire young Saudis by promoting exchanges with SMEs in other countries. In February 2014, the CSC announced a deal to strengthen cooperation in the SME sector at the end of the 14th Saudi Arabia-Japan Business Council meeting in Tokyo. The Arab News reported that 200 Saudi and Japanese businessmen discussed cooperation in training and technology. Delegates also resolved to increase visits for young entrepreneurs and business leaders between the two nations. Trade between Japan and Saudi Arabia is valued at approximately $56bn. A few days after the announcement, a delegation of British MPs met the Saudi International Trade Commission at the CSC in Riyadh, and Omar Bahlaiwa, the CSC’s secretary-general, called for strengthened cooperation in training and expertise in to the SME sector.

OTHER CHALLENGES: Despite the sector’s significant potential, it still faces several key obstacles that limit growth. Regulations, taxes and the Customs regime, which affect all companies, tend to pose greater challenges to smaller firms, particularly those at the start-up stage.

Another major challenge comes from the regulations of the Ministry of Labour. The Saudiisation programme has a disproportionally adverse effect on small businesses, as larger companies can afford to hire Saudis and they can thus crowd smaller companies out of the labour market. In addition to the factors already discussed, small companies that have established themselves sometimes face expensive delays if they need to hire foreign staff, due to the stringent nature of the Kingdom’s visa regime.

SUPPLY CHAIN: Big businesses in Saudi Arabia are also encouraging smaller firms to play a bigger role in their supply chains. In September 2013 the Saudi Aramco Entrepreneurship Centre (Waed) and General Electric organised the Saudi Supplier Conference aimed at encouraging greater participation by local firms in the manufacturing and services sectors to create jobs for enterprising young Saudis. Jamal Naboulsi, the managing director of Waed, said, “The mission of Waed is to support the Kingdom’s efforts to transform into a knowledge-based economy and to significantly contribute to the creation of quality and sustainable jobs for Saudi nationals.”