With micro, small and medium-sized enterprises (MSMEs) accounting for such a large share of Dubai’s economy, financing these vital wheels of the emirate’s industrial machine has become an increasingly important part of both bank and government development plans. According to research by government agency Dubai SME, some 95% of the emirate’s businesses fall into the MSME category, with these firms employing 44% of Dubai’s total workforce. The emirate also accounts for around 50% of all MSMEs in the UAE.
INFORMATION SHORTAGE: Financing sources for these businesses have traditionally been outside the banking sector. The reasons for this are many, with structural causes being a main factor. Dubai is largely a non-tax regime for these MSMEs, and consequently there is a lack of earnings data for these companies. The accounting regime is also widely seen as relaxed, which, while having obvious benefits for businesses, means that banks have very little solid information to go on when assessing the financial robustness of a particular enterprise. This leads to banks charging a premium on interest rates to cover for “information risk” – the lack of transparency in the affairs of businesses. Faced with such high rates, most MSMEs go elsewhere for their financial needs. Traditional sources are family, friends, and the reinvestment of profits and savings.
Another structural risk comes from the nature of Dubai itself. With expatriates estimated to account for over 80% of the population, the bulk of the MSMEs are expatriate-staffed and -owned. Therefore, banks have to factor in “skip risk” – the likelihood of a business owner skipping the country and leaving behind their debts. Current laws criminalising bankruptcy add to this risk. Additionally, there is “visa risk” – with many expatriates on two- or three-year visas, they may be obliged to leave if they are unable to renew their visa, while the brief nature of their residency means short-term repayment periods, with larger instalments than normal required.
In addition there is no central, UAE-wide repository of credit information on individuals for banks to draw on. Assessment of creditworthiness is done on a reputation basis, with other banks asked, but not obliged to reveal, previous credit history.
These factors have tended to raise bank rates when it comes to loaning to MSMEs, while also making these businesses far less likely to come to banks for financing in the first place. A 2011 study by the Union of Arab Banks in the MENA region showed that just 8% of total bank loans that year went to SMEs. Dubai SME estimates that about 86% of the emirate’s SMEs have never sought a bank loan.
ACTION STATIONS: The Dubai – and UAE – authorities are, however, well aware of these challenges. Dubai SME in particular has initiated a range of strategies to bring MSMEs into the financing mainstream, including plans to create a pipeline of listings on the emirate’s capital markets (see Capital Markets chapter). Meanwhile, a new SME law has been proposed by the UAE’s Ministry of Economy, with this widely expected to be enacted by the end of 2012. This should simplify procedures for MSMEs to gain loans, with some debate too on whether a specific financial institution should also be established to direct financing towards MSMEs. In addition, the federal authorities are in the process of launching a credit bureau, which should add considerably to banks’ capacity to assess risk, making loans more affordable for businesses.
PULLING RANK: Dubai SME has also begun regularly assessing SMEs and listing them in its ranking, the Dubai SME 100. “We used a range of criteria to make up the ranks,” Alexandar Williams, the director of Dubai SME’s strategy and policy division, told OBG. “We also found that about 50% of the top 100 SMEs in the 2011 rankings are very good and potentially investment-grade.” This list should provide banks and investors with the missing link to assess the creditworthiness of enterprises, while also accustoming MSMEs to boost corporate governance, accounting, professionalism and transparency as ways of gaining access to banks and the financial markets.
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