New arteries of finance for SMEs

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New arteries of finance for SMEs
SMEs might be small in size but make significant contributions to the economies and generate employment for many.

Small and medium enterprises have always enjoyed traditional forms of capital from banks, but now these are well complemented with financial succour from government funds, venture capitalists and crowdfunding platforms

by

Suneeti Ahuja Kohli

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Published: Wed 25 May 2016, 10:55 AM

Last updated: Wed 25 May 2016, 2:57 PM

The small and medium enterprises (SMEs) are the bloodlines of economies worldwide. These companies might be small in size, but make significant contributions to the economies and generate employment for many. In the UAE, the sector contributes more than 60 per cent to the non-oil GDP, and has employed more than 85 per cent of the workforce engaged in the private sector.
Notably, around 350,000 companies are registered under the SME category and represent more than 94 per cent of the total number of companies operating in the UAE. The sheer scale of numbers involved is staggering, and one would expect that the sector is adequately served and funded for it to thrive at such a pace. In contrast, banks lend just 3.8 per cent of their lending portfolio to this sector, which industry experts say is a nominal percentage and is not on par with the actual potential of the sector.
Funding and operational issues are among the critical factors that lead to the failure of projects. In the UAE, the rate of failure of SMEs is around 30 to 40 per cent.
A recent report by the Department of Economic Development (DED) too corroborates this fact and notes that eight out of 10 SMEs in the UAE rely on self-financing for growth and development.

Current state of affairs

What is a typical SME like in the region?
  • Majority have fewer than 10 employees
  • Business period of one to three years
  • Annual sales turnover of less than Dh10 million
  • Average revenue and profitability growth of 9.4 per cent and 8.9 per cent respectively in the last three years
The price of oil has plummeted from its peak in mid-2014 at more than $110 a barrel and lost more than 60 per cent of its value. This has directly affected the performance of SMEs in the region, and many are currently grappling with slow economic growth in the wake of sticky oil prices and low commodity prices.
A latest survey by SME financier Gulf Finance points at the precarious financial situation of the sector and reveals that small and medium-sized businesses continue to be affected in the first quarter of this year with payment collection and difficulty in tapping debt.
The persistently sticky economic environment has severely impacted businesses in the region. In the UAE, SME activity and business has taken a hit and consequently restricted its ability to repay loans. The unsettled loans are to the tune of Dh7 billion, as per industry experts.
Initiatives by banks
However, in March this year lenders in the UAE agreed to halt criminal proceedings for bounced cheques drawn by SME customers under a rescue initiative. Described as the 'mini-insolvency law' by Abdul Aziz Al Ghurair, Head of the UAE Banks Federation, the scheme allows debtors a 15-day period to agree to a restructuring scheme with creditors. This may be followed up by a redressal period of up to 90 days wherein banks will refrain from any pre-emptive action, which includes prosecution in the courts or a travel ban.

The initiative is helping create a dialogue between banks and SMEs and opened a window of opportunity for the sector. As per Al Ghurair, it has stopped customers from defaulting and flying off from the country. "Now some of them are volunteering and saying 'let me work out a solution'."
Moreover, banks such as RAKBANK, Abu Dhabi Islamic Bank, and Mashreq have created special banking platforms for the SMEs that cater exclusively to their needs and extend significant support.
Government throws a lifeline
There is plenty of support from the government through funding programmes to serve the sector better. The Department of Economic Development (DED) in Dubai, for instance, is extending support to the sector through its platform DubaiSME. It had launched the Equity Investment Initiative in 2014 to provide financial succour to SMEs and entrepreneurial projects. It has now unveiled a comprehensive report 'State of SME Equity Investment in Dubai' - a first ever report that presents an estimate on the market size, scope and potential impact of equity investment in SMEs, in addition to the overall state of equity investment in SMEs across the UAE.
The DED has also launched Dubai Ventures Network to create an ecosystem for equity investment in SMEs by involving all major stakeholders. This network will target investments between $50,000 and $100,000, unlock investment and funding for the sector, and attract direct capital from private equity (PE) investors, venture capitalists (VCs) and angel investors, and help Dubai achieve its Dubai SME 2021 Strategic Plan.
Explained Sami Al Qamzi, Director General of DED: "Limited source of funding to start businesses is a major gap in our SME ecosystem, which is underlined by the finding in the report that 80 per cent of the start-ups relied on self-financing as a source of capital." He added that addressing market gaps and channelling investments into SMEs is critical to Dubai's knowledge economy initiative.
Funding programmes
Khalifa Fund: One of the popular initiatives of the federal government, the Khalifa Fund for Enterprise Development (KFED) was launched in 2007 with a capital investment of Dh2 billion. To date, the fund has awarded Dh1.4 billion ($380 million) to Emirati-run start-ups across the emirates, supporting around 1,100 projects.
On an average, it receives 150 to 200 applications per month. It typically awards between Dh100,000 to Dh10 million for projects, and is committed to finance at least Dh200 million a year.
Over the years, Khalifa Fund has launched several innovative schemes that has made debt facility more accessible for businesses and extended its reach. In 2014, the fund launched a new guarantee scheme in partnership with Arab Bank, under which the bank would finance SMEs approved by the fund, up to a maximum of Dh5 million ($1.36 million). The fund has a similar arrangement in place with Abu Dhabi Commercial Bank.
Crowdfunding
Besides the line of support from the government, private equity and angel investing are among the preferred options for SME financing.
Crowdfunding is a more collaborative approach to raising investment and uses the Internet as a platform to reach thousands or even millions of potential investors, enabling a mutually beneficial relationship between the investor and businesses. For the investor, smaller levels of investment across a diversified portfolio minimises potential risk and offers attractive rates of return. Businesses are exposed to new channels of investment to drive growth with more flexible repayment terms.

Crowdfunding is of particular significance to the future growth of small and medium-sized enterprises (SMEs), who until now may have struggled to gain the investment or funding required for expansion from traditional channels. Such programmes are gaining ground with SMEs for various reasons, which chiefly include lower overheads, diversification of risks, relatively smaller investments because of a large pool of investors available.
According to a report by Foundation Capital, global peer-to-peer lending, increasingly referred to as marketplace lending, is estimated to be valued at almost $9 billion in 2014 and is forecast to deliver $1 trillion by 2025.
Companies like Kickstarter and Lending Club have proven that this is a highly successful concept in the US and Europe. Kickstarter has raised Dh535 million since its launch in 2012. More than 20,600 projects have appeared on Kickstarter UK and over 8,000 have been successful.
Global peer-to-peer lending (or marketplace lending) can produce strong results. RSA Insurance Group (Royal and Sun Alliance) in the UK quoted that 30 per cent of the investment comes from family and friends, 30 per cent from acquaintances, whilst the remaining is from the 'crowd'.
The concept is picking up pace in the UAE too. Beehive, a crowdfunding website that links UAE-based SMEs with approved prospective investors, has attracted more than 2,000 investors and provided Dh30 million in loans to about 60 SMEs since its launch in 2014. More than 10 companies in Dubai100 have benefitted from this platform. In September 2015, Beehive became the world's first independently certified Shariah-compliant P2P finance platform.
Some of the prime benefits, as claimed by its operators, include finance that is 25 per cent cheaper than the official bank rate and ability to furnish funds in as short a time as five days compared with three or four months for the banks.
Most of the borrowers and investors are based in the UAE, but the firm is increasingly getting interest from Britain too.
With choices aplenty, the sky is the limit for SMEs to grow and flourish.
Highlights of State of SME Equity Investment in Dubai report
  • In 2014, total value of early-stage equity investments in Dubai amounted to around $30 million. This is expected to grow in the near term by about 15 per cent.
  • Businesses in the UAE, and particularly in Dubai, are witnessing significant interest from angel investors in the US and Europe.
  • Knowledge-oriented sectors such as life sciences, ICT, media and healthcare are expected to attract more equity financing.
  • Indian nationals have topped the list in terms of attracting the maximum equity funding last year at around 23 per cent; this was followed by British and Jordanians.
  • Indians also topped the list in case of community-based financing of investors at 46 per cent, followed by Emiratis at 12 per cent.
 
- suneeti@khaleejtimes.com


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