New York Times: U.A.E. Bolsters Small and Midsize Firms

U.A.E. Bolsters Small and Midsize Firms
By Sara Hamden
This article originally appeared in the New York Times.
October 19, 2011 — DUBAI — The government of the United Arab Emirates is starting to introduce a long-planned overhaul of the rules that govern small and midsize enterprises as part of a diversification plan to reduce the economy’s dependence on oil. The changes aim to provide entrepreneurs with better access to financing and lower registration costs to set up new businesses.
A draft law, in the works for over a year, has now reached the final stage of cabinet approval, Sultan bin Saeed al-Mansouri, the U.A.E.’s economy minister, said at a business conference in Dubai this month. Provisions in the law will include the creation of a federal body to address financing issues and coordinate plans and policies for small and midsize enterprises, or S.M.E.’s, across the seven emirates.

“Though we are facing a lot of challenges,” Mr. Mansouri said, “we cannot build a very solid base for small and medium enterprises unless we take very important positions on federal and legal levels.”
The law is one of a series of initiatives aimed at strengthening the small and midsize business sector, which makes ups nearly 95 percent of all U.A.E. companies, according to data from the Economy Ministry. With a focus on holding them to international standards, Dubai SME, an agency of the emirate’s Economic Development Department, will also publish a code of corporate governance to accompany the new legislation. The code will complement the Top 100 S.M.E. index, which was created in April and ranks Dubai’s top small and midsize businesses in an effort to promote transparency.
The introduction of smeconnect.ae is another initiative, announced this month, to encourage growth of the sector. The Web site is designed to be a networking platform for U.A.E. entrepreneurs and service providers.

These measures are particularly important to stimulate growth of small and midsize businesses, which cannot rely on oil revenue in the way neighboring Abu Dhabi can. An established S.M.E. sector translates into job creation and a diversified economy, which are crucial for economic sustainability in Dubai and in the region generally.
“The subject of corporate governance has become a necessity for growth and development; without it, companies are unable to function optimally, especially in this new world order,” Sami Dhaen al-Qamzi, director general of the Economic Development Department, said at another conference in Dubai.
The aim of the new laws and higher standards of corporate governance is to allow these businesses to become “more bankable and investable for a sustainable future,” the department said in a statement, adding, “It is about greater access to finance for growth.”
Access to financing remains one of the biggest hurdles to growth for small businesses in the U.A.E. and across the region, with banks reluctant to lend to relatively risky new ventures, analysts say.
“The money exists, but banks are not lending to S.M.E.’s because they are more traditional and more comfortable relying on personal guarantees,” said Dimitris Tsitsiragos, vice president for Eastern and Southern Europe, Central Asia, Middle East and North Africa at the International Finance Corp., the private-sector arm of the World Bank. “S.M.E.’s in this region have the lowest access to finance in the world. There is money out there on the one hand, but the money is not going anywhere.”
Over the past few years, economies in the Middle East and North Africa, Mr. Tsitsiragos said, have experienced growth that did not trickle down to create enough jobs to absorb the young population. Countries in the region are characterized by high unemployment rates and young populations, with an average of 60 percent under the age of 30, according to data from Standard & Poor’s and the International Monetary Fund. Yet unemployment among youths in the Middle East stands at 25 percent, the highest in any region in the world, according to CHF International, a development organization with operations in the Middle East and North Africa.
The World Bank estimates that 40 million jobs must be created in the next decade alone to keep pace with the youth bulge. The frustration over lack of jobs for the growing young population fueled the revolutionary spirit across the region, pushing governments to make job creation a priority, in part by promoting entrepreneurial ventures. Lack of access to financing, however, is a major impediment to growth of new businesses in the region.
“Banks are giving loans, but still the contribution is so limited,” Mohammed Ali bin Zayed al-Falasi, deputy governor of the U.A.E.’s central bank, told the Dubai conference. “Banks are very concerned with default risk, but that will not and should not hinder financial support of the S.M.E. sector because it is unjustifiable to deprive new businesses from loans and overdraft facilities needed for growth.”
Bank loans to small and midsize businesses accounted for only 2 percent of total lending in the Gulf, according to Reuters, based on a survey published this month by the Union of Arab Banks and the World Bank.
In the Middle East and North Africa region as a whole, a recent study by the International Finance Corp. and McKinsey put the number of formally established small and midsize businesses at up to 2.3 million, with an estimated shortfall in their financing needs of about $140 billion.
Lending to the sector, as a percentage of total lending by banks, averages just 8 percent in the region, compared with an average of 27 percent among the countries of the Organization for Economic Cooperation and Development, according to a report by CHF International.
“Banks have to see that this sector is possible to serve, that it opens up market opportunities and a chance to cross-sell products in a way that can be rewarding for them as well,” said Elissa McCarter, vice president of CHF International, which is based in Washington.
Although more than half of the formal S.M.E.’s in the Middle East and North Africa maintain bank accounts, most do not have access to credit, Ms. McCarter added. Organizations like CHF International are collaborating with regional banks to offer loan guarantees and share risk with banks that extend loans to entrepreneurs.
“The guaranty facilities are a recognition that banks are going to be nervous about too much exposure to this sector, and are a way of mitigating some of those risks,” Ms. McCarter said. “Now, more than ever, is the time to invest in businesses that will drive greater stability and economic opportunity in the region.”
The International Finance Corp. has introduced similar programs and worked with regional banks to disburse over 43,000 loans to small and midsize companies, valued at over $190 million in the 2010-2011 fiscal year alone. The corporation has worked with banks like Ahli United to promote lending to the sector in the Gulf. Ultimately, the sector’s growth relies on the creation of a healthy legal and bureaucratic environment shaped by the public sector — like the new laws, indexes and codes introduced in Dubai — to make it easier to set up, run, liquidate, list and evaluate businesses. Yet growth must be driven by the private sector to succeed, analysts say.
“The private sector needs to be at the forefront,” said Mr. Tsitsiragos, of the International Finance Corp. “This is where sustainable growth will come from.”