The latest Arab Youth Survey revealed the “entrepreneurial spirit is high and a growing number of young Arabs would like to work in the private sector”.
According to the survey 67 per cent of young Arabs are confident their generation is more likely to start a business than the previous one, businesses that will create much needed employment opportunities. But, if this new wave of entrepreneurship is to deliver sustainable prosperity for future generations, it is imperative that those wishing to start their own business have ready access to funds, especially during the critical first three years following start up. In the Islamic economy, this means access to Islamic finance.
Unemployment is one of the biggest challenges facing GCC governments. Across the GCC, unemployment rates among young nationals range from 14 per cent in the UAE to 48 per cent in Saudi Arabia. To put these figures into perspective the average unemployment rate among young Arabs – 28.1 per cent – is twice the global average. Such high levels of unemployment, mostly among those aged 30 or under, have the potential to depress per capita standards of GDP, put living standards at risk and create economic inequality.
So far, some of these consequences have been avoided thanks to GCC government’s use of oil revenues to provide welfare for their citizens. However, these levels of spending are unsustainable in the long run. Both oil and gas are finite resources and vulnerable to replacement by technological advances. GCC governments recognise the need to diversify their economies. Yet despite their efforts, unemployment among nationals continues to grow.
The Dubai Capital of the Islamic Economy initiative is intended to expand and diversify the nation’s economic base, which in turn will help to create employment opportunities in strategic business sectors. In all this, the role of entrepreneurship will be crucial. Small and medium enterprises (SMEs) are the backbone of the nation’s economy. In Dubai alone they make up 95 per cent of all businesses; employ 42 per cent of the emirate’s workforce and account for 60 per cent of the emirate’s GDP.
Therefore, if the Islamic economy is to flourish the necessary legal and business environment needs to be in place to encourage entrepreneurs to invest in Islamic economy businesses. Of vital importance is the availability of Islamic finance. According to a recent study by the International Finance Corporation (IFC), there is a potential gap of up to US$13.2 billion in Islamic SME financing across the Middle East and North Africa (Mena) region. A high level of risk aversion by banks, poor regulatory environments, differing perceptions of Islamic finance and a lack of relevant products are most frequently cited as reasons why SMEs are starved of funding.
At the Dubai Islamic Economy Development Centre (DIEDC) we are working to create the right economic and legal frameworks for SMEs to flourish. However, the centre cannot do this alone. The UAE Government has a role to play; so does the private sector. Islamic banks, in particular, need to rediscover the principle of shared value, which involves creating economic value in a way that also creates benefits for society by addressing its needs and challenges.
If the Islamic economy is to fulfil its potential, Islamic banks must move beyond the mindset that prioritises short-term profits over the broader influences that determine long-term success. So, the DIEDC will encourage the country’s Islamic banks to adopt a new approach to risk and reward by making it easier for start-ups to obtain Islamic funding and, if entrepreneurs encounter difficulties, to restructure their businesses so they can regroup and go again.
Most entrepreneurs fail several times before they make it. It is part of being an entrepreneur. So, if we are to see the innovation necessary for Arab economies to compete with the rest of the world, Islamic banks must see failure as simply an opportunity to start again rather than a car crash with no survivors.
SMEs are the powerhouse of the UAE economy and in totality the biggest employers. It makes sense, therefore, to make it easier for entrepreneurs to succeed by reinstating shared value into the risk-reward equation, a step that would not only create economic value for the banks but also benefit the wider society in meaningful ways.
To bring this about, Islamic banks will need to rethink how they support true value creation in new businesses. It involves some financial risk. But the risk to society is much greater.
If the Islamic economy is to deliver the next wave of innovation and productivity growth, Islamic banks should redefine their purpose in terms of creating shared value, rather than simply delivering profits for shareholders.
Abdulla Al Awar is the chief executive of the Dubai Islamic Economy Development Centre
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