SME financing in UAE still under development

It will take five years or more for the country’s system of financing SMEs to acquire the breadth of more mature markets, says a commercial banking executive.

“The UAE’s level of sophistication, with regard to finance alternatives, on a range from one to 10, we are two to three,” said Nilanjan Ray, managing director of commercial banking for the Gulf at National Bank of Abu Dhabi (NBAD).

“If we want to get to the level of more mature markets we are looking at five years at least, a significant time.”

SMEs account for about 60 per cent of the country’s non-oil economy. But for many SMEs, bank financing is a challenge.

In November, a survey of SMEs by the personal finance website souqalmal.com found that just 28 per cent of respondents had taken out business loans or financing from a bank. The survey found that 31 per cent of SMEs were self-funded – the most popular option.

At the same time, the number of accelerators, incubators and angel investors is growing.

One new idea for financing SMEs emerged in Europe amid the global financial crisis.

This is the mini-bond market, which allows SMEs to tap funding from institutional investors only. In Italy alone, Deutsche Bank estimates that SMEs have an appetite for US$50 billion to $100bn of such financing.

“I do not think the UAE is too far away from this system. It did not exist in Europe two to three years ago, the regulators reacted to the crisis and acted,” said Roberto Mancone, managing director and global head of business products at Deutsche Bank.

“It is not for retail investors, it is only for institutions who understand the risks involved. There is a lot of liquidity in the market and potential for growth over the next five years … It depends on the capability and willingness of the UAE’s SMEs to increase transparency.”

But as more SMEs explore alternative financing, they may find that investors are difficult taskmasters.

“Investors have high expectations everywhere,” said Noor Sweid, an angel investor and board member of the New York-based accelerator Endeavor.

"Entrepreneurship is risky and the risk appetite is not the same as where the ecosystem is more developed.

Angel investing and seed investing is at least one generation old, [but] here it is barely nascent.

Finding investors here is tough if you need $500,000, be prepared to approach 100 people. No one wants to invest alone so for every 10 people, you meet one who may say yes. It takes a lot of time and effort.”

Follow The National's Business section on Twitter