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Leading UAE banks turn to SMEs to diversify their asset portfolios

The steep fall in the regional stock markets and high exposure to the real estate sector are compelling banks to rethink their asset allocation strategy. “There are a large number of successful small and medium businesses in the UAE. The banking sector in the country has begun to take this segment of customers seriously in terms of offering funding and other financial services such as trade finance, bank guarantees etc,” said Steve Williams, Chief Operating Officer of Lloyds TSB.

Lloyds has announced the launch of the Lloyds TSB Small Business Awards 2006 to recognise the most outstanding contributions made to the country by the small businesses in the UAE.

Traditionally, banks in UAE have been reluctant to offer various banking services such as funding and trade finance to small enterprises. “We could not offer trade finance facilities such as letters of credit or factoring facilities to many UAE based small firms because in most cases volumes were too low and in some others, potential customers could not get bank guarantees,” said the trade finance head of a local bank.

The scenario is fast changing with most local and international banks starting SME divisions to cater exclusively to this segment. “Banks are seeing big opportunity in building relatively low risk assets in the SME sector. While a large portion of consumer lending in the UAE is not collateralised as most personal loans are given against future earnings of individuals, SME sector offers banks with the opportunity to build fully collateralised low risk assets,” said an analyst.

With IPO-linked income streams such as fees and interest on leverage virtually vanishing, cash rich UAE banks are forced to look at alternate asset classes in their core banking business. The second quarter results for 2006 reveal that many banks have reported a decline in profits compared to the previous quarter and the comparable period last year.

"Strong profit growth during the past two years have been from the stock market linked income streams. In the rising interest rate environment, banks will have to strive hard to find good quality assets to keep up their core banking performance to offset the loss of business from stock market-linked businesses. Although there has been substantial growth in exposure to project finance, a large portion of this are real estate-linked exposures. Thus there is some amount of urgency among banks to diversify their assets,” said a banking industry analyst.

A number of local banks such as RAK Bank, Emirates Bank and Dubai Islamic Bank and National Bank of Abu Dhabi are already present in the SME sector. Emirates Bank Group, a pioneer in SME sector lending was instrumental in setting up the 'Al Tomooh' programme, which has funded several local small business projects during the last five years. A recent study by Dubai Chamber of Commerce and Industry (DCCI) shows that more than 94 per cent of the firms in the country fall in the SME category.