Fresh calls to ease lending restrictions for UAE small businesses

A new report calls for easing restrictions on who can take security against SME lending and reiterates a call for a central registry.

Banks say small businesses have higher risk of failure which makes them less attractive as customers. Silvia Razgova / The National

A new report has called for easing restrictions that will enable angel investors or private individuals to take collateral when lending to small businesses.

The study, which was released by the Dubai Economic Council, also reiterated a call for a central registry for small- and medium-sized businesses that would list their assets when seeking loans.

The lack of an adequate security regime is a major reason for low bank lending to SMEs, according to the report Understanding SME Financing Mechanism from the UK law firm Pinsent Masons in collaboration with Zawya.

The Pinsent Masons report recommends a central registry with a government institution that lists SMEs and the assets it owns and has pledged to improve transparency when it goes to get loans. A similar move had been suggested by the UAE Central Bank and the World Bank.

“Such companies would be required to notify the central registry each time security interest is created on such assets,” the report said.

Banks in the UAE lend against collateral and SMEs by nature are asset-light entities, so they are not really able to avail of bank lending, said Amir Ahmad, a partner at Pinsent Masons’s Dubai office and the co-author of the report.

“SMEs do not have lots of land or factories but they have lots of receivables, but banks do not lend against receivables as much as one would like them to be,” Mr Ahmad said. “I don’t think it is unique to this region but shortage of funds for SMEs is significant here in this region. SMEs profit the least from bank lending facilities compared to Europe or Asia.”

Small businesses comprise 94 per cent of the total number of businesses in the UAE, according to Khalifa Fund, but banks’ rejection rate for SME lending in the UAE is 50 to 70 per cent.

A total 51 local and foreign banks operate in the UAE.

In the World Bank’s Doing Business report this year, the UAE improved its ranking to 23 out of 189 economies, one of the best rankings in the region. But in the ease of getting credit, it ranks 86th. In investor protection it ranks 98th.

The report recommends the easing of restrictions on who can take security, besides banks and financial institutions, to broaden the pool of funding sources such as private individuals.

“Angel investors, family and friends can only lend unsecured,” Mr Ahmad said. “Rules should change making it possible for angel investors or individuals to take security when giving loans to SMEs.”

Currently, early stage SMEs do not get any bank lending, while those in mid-maturity get anywhere between 10 per cent and 20 per cent of their funds from banks, he said.

“That is not enough compared to similar economies as the UAE,” he added.

Ambareen Musa, the founder and chief executive of Souqalmal.com, says she has never approached banks for funding in the two years from the start of the business because she knew she would not get it.

The financial product comparison site in January raised US$1.2 million from Hummingbird Ventures in its second round of funding.

Banks say small businesses have higher risk of failure and do not have sufficient collateral, and the quality of cash flow makes them less attractive as customers. But SME owners, such as Ms Musa, say lenders have too many criteria, such as that SMEs need to be in business for two to three years, have a certain level of revenue and show stability.

“Unless you are profitable you can’t take a loan as a company, and SMEs for the first two to three years have negative profitability,” she said. “You can take loans as an individual but only if you draw a salary.”

An advantage of approaching banks is that SME owners get to keep 100 per cent of the equity with themselves, unlike if they seek funding from venture capital firms or angel investors.

But investors also help the business owners set business targets and help to achieve them, said Ms Musa.

“If we need growth capital, I don’t see why we wouldn’t go for bank lending,” she said. Souqalmal.com expects to break even this year.

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