Big obstacles for Dubai's SMEs

More new businesses launched in Dubai last year than 2010. But experts warn high setup and financing are preventing many small and medium enterprises from getting started, or growing in size.

Nigel Sillitoe, the chief executive of Insight Discovery, says a lot of UAE banks do not go beyond their advertisements offering support to SMEs. Jeffrey E Biteng / The National
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The number of new businesses in Dubai climbed last year, although high set-up and financing costs are preventing many small to medium enterprises (SMEs) in particular from getting started or growing, experts warn.

A total of 14,360 licences were issued in Dubai last year, up from 13,817 in 2010, according to the emirate's Department of Economic Development (DED). Dubai SME, an agency under the DED, today plans to announce its first ranking of the top 100 SMEs that are most successful in this market.

But many aspiring small-business operators cannot afford to get started in the first place, because of high set-up costs.

"If you look at the UK or US, the cost to register a company is about £100 [Dh578]," said Edward Roderick, a co-chairman and the managing partner of Envestors Mena, which raises financing for entrepreneurs. "It takes a couple of hours and does not require you to hold any premises."

Here, start-ups face Dh18,000 to Dh30,000 in licensing and visa fees, plus an average of Dh50,000 for commercial office space, Mr Roderick said.

"When you're a start-up business here, you're looking at going all in," he said.

While SMEs constitute 90 per cent of all businesses in Dubai and contribute 30 to 35 per cent of the UAE's GDP, they receive less than 4 per cent of total bank loans issued across the Emirates, said Hamad Buamim, the director general of the Dubai Chamber of Commerce & Industry.

"If you were to drive around Dubai, in particular, you'd see a lot of advertisements from banks with SME initiatives," said Nigel Sillitoe, the chief executive of Insight Discovery, a market research consultancy based in the UAE. "But the reality is a lot of banks don't actually support SMEs."

Insight, which has consulted with regional SME experts and managers of small businesses in recent months, issued a report this year highlighting the challenges that this sector faces while trying to grow strongly.

Mr Sillitoe notes that potential financiers consider some commercial ideas as too risky, which some warn leads to "punitive" interest rates on loans, some in excess of 20 per cent.

Part of the issue is that many SMEs are service businesses, which means there may be few or no "hard assets" that can be offered to banks as security, Mr Roderick noted.

Even if a business does secure financing, a bank sometimes changes certain terms, making it difficult for some SME owners to meet new conditions.

WMS Metal Industries, a UAE business that makes and installs stainless-steel products for construction, manufacturing and oil and gas companies, struggled to find an international bank that would offer it financing when it started in 2007. Most institutions wanted to have a commercial relationship for at least three years before starting a serious conversation, so WMS instead ended up with a local bank.

But while WMS obtained facilities through its bank that were valid for 90 days, it received a call on the 59th day saying terms had changed and that the facility would now be valid for only 60 days.

"I had to close my position with the bank within 24 hours - and there was no recourse for me to take at the time," said Mohamed Nassar, the managing partner at WMS, as quoted in Insight's report.

Some banks and financing firms say they have become increasingly interested in SMEs and are trying to foster growth in this sector.

On Wednesday, the Dubai Chamber of Commerce announced that National Bank of Abu Dhabi would help to provide up to US$100 million (Dh367.3m) of funding to chamber members that are SMEs. The bank aims to grant loans - with "competitive rates" - in just three working days, while offering assistance in managing finances and understanding repayment terms.

Gulf Finance, which has offices in the UAE, says it doubled its new lending to SMEs last year compared with 2010. Over the past 13 years, the firm has offered more than Dh3 billion of financing to smaller businesses across the Emirates, said Edward Allely, the managing director of strategy and credit at Gulf Finance. Other banks are trying to build closer relationships with SME owners.

In November, Mashreq launched a dedicated contact centre for SMEs, in which executives can update their trade licences or remit funds to their home countries.

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