Almost all of HSBC's US$100 million (Dh367.2m) fund to support small businesses in the UAE has been allocated amid strong demand for credit. About a quarter of the fund, which was set up in January, has been awarded to Emirati-owned small and medium-sized enterprises (SMEs). "We've been delighted with the way the fund has run, and utilisation and allocation has been quicker than expected," said Nicholas Levitt, the head of HSBC's commercial banking in the UAE.
Demand for credit has been strongest among SMEs in the trade, retail, and oil and gas sectors. HSBC launched the fund after signing a deal with the Ministry of Economy to target companies in the UAE that have a turnover of $30m or less and are involved in cross-border business. SMEs are a vital component of the UAE's economy, accounting for about 85 per cent of all employment in the country and contributing 46 per cent to GDP, according to recent government estimates.
But small firms were hit especially hard by a contraction of credit during the global financial crisis. Many such companies are still struggling to get the capital needed to sustain or expand their operations. "When the fund was launched there was a dearth of credit for SMEs," Mr Levitt said. "Irrespective of the economic cycle, one of the biggest barriers is access to debt financing and when the economic cycle tightens, it's more pronounced, but it's always been a continuous problem." HSBC had increased its overall allocation to SMEs in the first half of the year, he said.
Allocations from the fund have typically been between Dh1m and Dh6m, mainly as working capital, trade finance or short-term loans for firms to buy machinery and equipment. To date, 87 per cent of the fund has been allocated. Other banks are also extending support to the SME sector. Emirates NBD and First Gulf Bank provide loans for small businesses, while Commercial Bank of Dubai has been one of the major traditional lenders to SMEs in Dubai.
But analysts say a more robust legal framework, improved corporate governance and greater credit transparency would boost the sophistication of lending to small businesses. And the Ministry of Economy is working on an SME law designed to recognise the sector's value to the UAE economy. "Banks have little information about SMEs and for banks to know their risk, they need to understand the legal, business, economic and institutional environment," said Raj Madha, a senior analyst at Rasmala Investment Bank.
"They also need to understand a company's strategy and cash flow. If they know these things, they can lend at efficient levels, and if they don't, [they] will assume the worst and lending rates will be higher or banks will be unwilling to lend for the same amount." Difficulty in obtaining financing was highlighted by UAE small businesses as the single biggest barrier to conducting international business, according to HSBC's global survey of SMEs, released last week.