Bank lending to SMEs likely to fall amid corporate consolidation

Abu Dhabi Islamic Bank will possibly be lending slightly less to SMEs in 2015, a bank official said. Mona Al Marzooqi / The National

Lending to small and medium-sized enterprises will decline as the UAE’s banking sector undergoes a period of corporate consolidation and refocus amid slower economic growth, according to an expert.

The rush to issue loans to SMEs, a trend of the past few years, would now lead to heightened credit risks, said the chairman of Cedar Management Consulting International.

“SME lending in the UAE is approximately 5 per cent of all lending in the market,” said Sanjiv Anand. “There are about 300,000 SMEs in the country but only a third, approximately 100,000, are bankable.

“There has been a push for non-collateralised lending towards SMEs but not any more.”

Mr Anand said the spread between interest rates offered to SMEs and larger companies had narrowed significantly in the past few years.

The UAE is often said to be over-banked. In 2013, the country had 51 banks operating here, compared to 75 in Saudi Arabia, Kuwait, Qatar and Oman combined. The SME sector in the UAE, which had five or six banks operating in-country in 2008, now has nearly 20 lenders offering loans and financial products to SMEs.

"We will possibly be lending slightly less to SMEs in 2015 than we did in 2014," said Mahdi Kilani, the head of business banking Abu Dhabi Islamic Bank.

“Growth is flat right now, may be slightly below flat, but there is no need for panic.

“Conditions are not the same as 2014 so we have to act differently.

“We are looking for quality in the SME market. It can be a risky sector, so we want to make sure that we pick the right companies.”

The IMF expects overall economic growth of 3 per cent in the UAE this year, down from 4.6 per cent last year.

Bank earnings in the country were expected to grow in mid-single digits instead of low double-digits this year versus last year, while overall loan growth might slow to 8 per cent from 9 per cent, said the credit ratings agency Standard & Poor’s last month.

In the SME sector, there are opportunities in areas beyond lending, according to National Bank of Abu Dhabi.

“We do not think the margins have fallen in the SME segment,” said Nilanjan Ray, NBAD’s managing director of global commercial banking.

“Our model for the SME segment does not only focus on lending and we see significant part of profitability being derived from flow businesses [such as foreign exchange and trade finance].”

Although there was some pressure on profit margins, NBAD “would rather look at relationship profitability and return on capital among other parameters to evaluate our strategy” and the SME sector “continues to score very well using such parameters”, said Mr Ray.

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