Specialist Banks for SMEs Vital for UAE

Specialist Banks for SMEs Vital for UAE

Mohammed Elsidafy  on Monday, April 27, 2009

Specialist banks should be set up to finance small and medium enterprises (SMEs), say experts.

The move would overcome restrictions on obtaining finance faced by SMEs and was essential as such companies were vital arteries of the national economy.

The experts stressed the need for the government, through the industrial and real estate banks, to meet the liquidity requirements of SMEs so that they could continue with their activities.

The government should instruct banks to exempt SMEs from the conditions and measures enforced following the global financial crisis, as smaller companies might not be able to provide the guarantees required by the banks.

The experts stressed the role of SMEs in diversifying the production base of the country’s economy and their role in supporting and developing sectors such as the real estate and commercial fields.

They said SMEs accounted for 80 per cent of the UAE’s economic activity, which meant they employed a large number of employees, who needed housing and accounted for a large share of the country’s trade and shopping turnover.
A study by Dubai Chamber of Commerce and Industry concluded that bank credit represented a major source of finance for SMEs. But these companies faced difficulties when seeking the liquidity they needed since bank credit classifications of SMEs were low. They tended to be placed in high-risk categories because of their weak financial structures. Dr Ahmed Al Janahi, Deputy Group CEO of Noor Islamic Bank, admitted that SMEs found it difficult to obtain finance. But he added: “The refusal of banks to finance SMEs by more than five top 10 per cent of the total banking portfolio is in line with the Central Bank’s instructions.

“The region lacks institutions which specialise in funding these enterprises, which are available in the US, France and China. The basic mission of commercial banks is to provide working capital, not finance business start-ups.

“So quality banks which work according to commercial regulations should be set up to finance SMEs at the regional level, not only in the UAE.”
Economic expert Dr Ahmed Al Banna said: “SMEs are the backbone of any country’s economy and in the UAE they contribute between 70 and 80 per cent of the gross domestic product. Therefore the absence of liquidity for such enterprises harms the country’s economy, especially in the current global and local economic conditions.”

Al Banna called for a study of the reasons behind the banks’ reluctance to provide the liquidity needed by SMEs to determine whether the cause was their classification in the high-risk category.

“Proper solutions should be found to the financial obstacles faced by SMEs, they should be exempt from the normal requirements. Banks are reluctant to provide finance and liquidity to SMEs, not only in the UAE but around the world.

“Government intervention is needed. The Central Bank should issue directives to secure the liquidity needed by SMEs.

“Central Bank controls over banks operating in the UAE should be reasserted in the light of the reluctance of many banks to provide liquidity.”

Al Banna demanded legislation to enable individuals and companies to secure liquidity and move local economic activities forward on the one hand, and to protect the rights of banks on the other.

Yousuf Obaid Al Nuaimi, a member of the Federal National Council and former HSBC expert, said banks required SMEs to repay loans over short periods of three to six months. In addition the banks were refraining from extending new finance to these enterprises. “These pressures harm the future of SMEs, which have no option but to stop their activities, lay off labour or transfer the business to another country.

“It is true we are facing a global crisis, but we have to look for solutions, not only by providing the liquidity needed by those enterprises but also by supporting them and maintaining their presence in the country.”

Al Nuaimi urged the Central Bank to exercise control over the banks in respect of their treatment of SMEs to reduce the pressure on enterprises. SMEs were a good source of profits for banks in times of growth and they should not be abandoned in times of crisis, he said.

Financial analyst Ziyad Al Dabbas said liquidity was very important for SMEs since it represented the working capital used to finance their activities, purchase raw materials, replacement parts and machinery and pay salaries.

“SMEs cannot meet the strict guarantees imposed by banks,” he added. “In addition some of these projects lack serious feasibility studies, which fotrces banks to classify them in the high-risk category.

“The government should give direct support to SMEs and prioritise them in the current conditions. And the Central Bank should issue clear instructions, which oblige the banks to provide the necessary liquidity so SMEs can continue their operations.”
Sulaiman Al Mazroui, General Manager of Corporate Communications at Emirates NBD, said national banks were not obliged to finance local projects and companies, especially SMEs.

However, Emirates NBD had not stopped financing local projects as it was convinced that they were one of the foundations that the national economy depended on.

“The corporate sector at Emirates NBD recently set up a specialist section, which gives advice to companies and opinion on their new projects,” he added. “That enhances relations between the bank and its clients, increases their revenues and helps them to avoid making losses.”

Uae has 208,000 SMEs

There are 260,000 trading and industrial companies in the UAE according to Ruwad Establishment – and 208,000, or 80 per cent, of them are SMEs. The UAE classifies companies according to the number of employees and the level of investment. A company is considered large if it has 100 workers or more and has investment of Dh5m or more. A medium-size firm has 10 or more workers and an investment of Dh2m or more, and a small one has three workers or more and investment of Dh200,000 or more.

Strong foundations

SMEs are supported by all governments in developed countries. Their exports form 30 per cent of the US’s total exports and 28 per cent of Japan’s exports.

SMEs played a major role in helping China’s economy to become the third largest globally. China has two million SMEs which have greatly increased Chinese exports.

Toyota, for example, manufactures eight million cars a year – and 80 per cent of the cars’ parts are produced by SMEs.
25% underperforming

Twenty-five per cent of industrial projects in some GCC countries are not performing to their full potential, according to the Gulf
Organisation for Industrial Consulting (GOIC).

The GOIC recently organised a forum in Oman to help participants plan for the future and teach them how to revive failing industrial units.

Delegates were told that boosting under-performing plants involved analysing strengths and weaknesses, restructuring, predicting cash flow and evaluating the need for fixed and working capital.

SOURCE: http://www.business24-7.ae/articles/2009/4/pages/26042009/04272009_46940e1d6ee14ac893c202f46969ace9.aspx