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. 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 in order to avoid potential prosecution and imprisonment, rather than seek to rescue and restructure their companies – an obvious deterrent to potential investors in higher-risk SMEs. The wake of the 2008-09 financial crisis had experienced a spike in these so-called “skips”.
The new law also reforms the penalties applying to bouncing cheques, another criminal offence that was widely viewed as incentivising debtors to leave the country. While bouncing cheques remains a criminal offence, issuers of bad cheques can apply for a stay of prosecution under the new law if they have initiated a “protective composition” – a new court-backed procedure aimed at rescuing companies that are not yet insolvent but are facing financial difficulties. In the case of insolvent firms that are determined by a court to be rescuable, a restructuring scheme will be drawn for their companies. Legal firm Clyde & Co describes this reform as a particularly helpful change, likely to encourage debtors to address their financial difficulties.
Additional changes in the law include a requirement that creditors be owed at least AD100,000 ($27,226) before they can apply to have a debtor declared bankrupt, as well as needing to give the debtor 30 days working notice in writing before doing so, and the creation of both a new financial restructuring committee and a register of insolvencies. Industry figures say the changes will help SMEs raise funding. “The bankruptcy law will be a great step towards improving the availability of non-bank investment financing,” Singhvi told OBG. “It will make it less risky for SMEs to borrow from private sources, while also providing investors with a clearer framework, allowing a financing ecosystem for SMEs to develop similar to those prevalent in other advanced economies.” He predicted that the law would help boost entrepreneurship and start-up activity. Saad, meanwhile, said the new law would help increase lending to the sector. “The bankruptcy law will give rise to increased clarity in regards to lending and will encourage new investment in the UAE,” he told OBG.
Financing Support
Another recent development with one aim to help SME financing was the launch of Al Etihad Credit Bureau in November 2014. The bureau will increase lenders’ confidence in lending to firms with good credit history and should help them to differentiate their rates for recipients depending on their credit history, helping to bring down borrowing costs for such companies. In June 2016 the bureau held its first Annual Subscriber Forum with a total of 59 subscribers, up from 27 in the first quarter of 2015. By mid-2015, 47 of the UAE’s 51 banks had subscribed and data covered 95% of the company lending market.
According to Murphy, other potential steps could be taken to further support the segment. “The role of SMEs are crucial in the broader economic development of any country in terms of production, employment generation, contribution to exports and distribution of income,” he told OBG. “Nevertheless, they often encounter issues in accessing finance, with these often aided by various tax breaks or direct government support in other jurisdictions. While there are many great initiatives across the UAE to support SMEs, it is crucial that viable ones are given every chance to succeed.”
Government Resources
Outside of financing, authorities have been taking other initiatives to support the SME segment. These include a memorandum of understanding signed between the Sharjah Investment and Development Authority, better known as Shurooq, and Dubai SME, a unit of the Dubai Department of Economic Development, in January 2017 aimed at supporting SMEs in both emirates.
In addition, the Sharjah Chamber of Commerce launched a new initiative in August 2016 to provide some 50 start-ups with free office space as part of its broader Incubate Business Programme. The chamber also offers business support to companies in their first two years of operation through various forms of resources, including education and guidance on business management and financial health planning.
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