THE BEST THINGS COME IN SMALL PACKAGES

Ras Al Khaimah 2017 | ECONOMY & FINANCE | FOCUS: SME'S

With loan defaults of up to US1.7 billion in the UAE and skip cases well documented, the challenge for the RAK government is to stimulate appropriate financing for the SME segment, boosting the economy with a flow of capital while making the segment more attractive for investors and entrepreneurs alike.

One element of the UAE Vision 2021 is to maintain SME growth, both in numbers and overall contribution to GDP. Currently 350,000 or so SMEs account for 60% of GDP and 85% of employment. These businesses are largely in the services, wholesale, and retail sectors and the government seeks to push that figure up to 70% of non-oil GDP.

However, the banking sector has not necessarily adopted the same fondness toward the SME segment, particularly noting the issues with loan impairment and the high failure rate of between 30 and 40%. In terms of structuring finance, the UAE is getting to grips with the unique needs of the country's SMEs. It is important to note that the definition of SME varies from one lender to the next, and results in the exclusion of a large part of the SME segment. For instance, RAK-based Commercial Bank International has around 5-10% of its portfolio dedicated to business banking for companies labelled SMEs that are turning over between AED20 and 100 million, the equivalent of USD5-27 million. RAKBANK, still around 50% owned by the government of RAK, is looking to target the business that might be seen as small-ticket by multinationals and larger UAE domestic banks.

Khalifa Fund, the Abu Dhabi-based financier for national entrepreneurialism, funded 44 enterprises in RAK between 2012 and 2015, which accounts for 24% of Khalifa Fund's loan portfolio outside of the capital. This coincides with the fund's non-financial programs, which include one-to-one assistance and a forum. The fund, although limited to the Emirate, acts as an incubator and can develop businesses with hands-on advice and guidance. Even though start-ups are an important economic contributor, and support for them follows the UAE's innovation directive, the wider-pressing issue is ensuring those businesses are operational and can get quick access to their cash.

RAKBANK, in an interview with TBY, recently affirmed its commitment to growing its loan portfolio within the Emirate; the bank will maintain a strong exposure to the SME segment, despite announcing a 3Q2016 profit drop of 70%. The bank's Tier 1 capital stood at an impressive 24%, while liquidity was not affected due to the numeration of depositors. In the coming years, this will be part of a more coordinated balance sheet that will see 30% of the book made up of wholesale banking.

The bank has restructured its approach to assessing business for finance, now looking beyond the figures and books, and taking a more analytical approach. The needs of SMEs are different to traditional wholesale and corporate bank accounts; they might have a higher volume of lower value transactions and may lack capital reserves. The bank has therefore introduced the point of sale (POS) loan and a buy-out loan that will help SMEs manage their day-to-day liquidity. Asset-backed loans to help the businesses invest in infrastructure have also been put in place.

The SME segment is expected to be shored-up as a destination for finance with the introduction of the long-awaited bankruptcy law. The law has been touted as well drafted but implementation is expected to bring challenges, including the presence of the required legal expertise to preside over cases. The law is expected to help restructure the finances of 1,700 SMEs across the UAE, with loans valued at USD1.7 billion
Many hope that this legislation will go a long way to increasing the attractiveness of the SME lending sector and further bolster a key chunk of the economy.