Bank lending to small and medium businesses (SMEs) is a regular topic of debate.
While entrepreneurs say banks need to further extend their lending to smaller enterprises, banks argue they need a blueprint of the revenue-generating model from SMEs before they will part with the cash.
“There is still a gap in early stage funding but the ecosystem is building up,” said Karim Aly, the co-founder of the start-up Task Spotting, an app that uses crowdsourcing and mobile technology to get real-time consumer feedback on products. “There are incubators coming up but we are still two years behind the United States for instance in terms of the [funding] ecosystem.”
Currently the proportion of loans to SMEs to overall bank lending is only about 3 per cent, yet according to Emirates Islamic SMEs account for 92 per cent of all companies in the UAE, 86 per cent of the nation’s workforce, and contribute about 60 per cent to UAE GDP.
The Dubai-based bank lends up to Dh2 million to smaller SMEs, has separate packages for businesses owned and managed by Emiratis plus customised packages for large SMEs where the amount of financing is structured according to the client’s business and needs.
Last year Emirates NBD, which has more than 24 per cent of the current market share, lent in excess of Dh1.5 billion to SMEs. Both the banks, however, declined to reveal the percentage of SME lending in their portfolios, and the number of companies they support.
“Financial institutions in the region are open to lending up to Dh20 million [to each SME] based on various factors,” said Vikas Thapar, the head of business banking at Emirates NBD.
These factors include an SME’s loan capacity, its age, balance sheets and financial statements and audited reports for at least three years. Banks will also want to assess a company’s business model, market conditions and the feasibility of the project.
However, with SMEs tending to apply for larger loans than they actually need, challenges remain.
“The biggest issue today with the SME segment in the UAE is that SMEs often do not have proper governance – whether it is financial governance or regulatory compliance, or governance around their business models, or succession planning,” Mr Thapar said.
Accounts for an SME are often not maintained properly, or are linked with the personal finances of the owner, banks complain.
“A balance sheet or financial statement that includes several transactions by related parties, or too many cash transactions, is often a cause of concern for banks,” said Mr Thapar, who added that securitisation has also been an area of concern.
“A substantial portion of the SME sector may not have the security required for conventional collateral-based bank lending, nor high enough returns to attract formal investors.”
As SMEs register rapid growth, banks say they need to focus on financial discipline.
“An SME needs to decide on the required amount of financing after assessing the end use, the required financing tenor, and its financing servicing capability,” said Faisal Aqil, the deputy chief executive for consumer wealth management at Emirates Islamic.
ssahoo@thenational.ae
