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Gulf banks tighten loan credit for SMEs

This is preventing the drop in new oil revenues from shrinking the ample liquidity in GCC banking systems.

Dubai — Banks are tightening lending conditions for small, private companies in the Gulf. Mostly, the six Gulf Cooperation Council (GCC) states are coping comfortably with the new era of cheap oil. Heavy state spending is keeping economies growing strongly.

Rather than borrow domestically or run down their deposits at local banks, governments of countries such as Saudi Arabia are covering much of the budget deficits due to cheap oil by bringing home some funds stored abroad.

This is preventing the drop in new oil revenues from shrinking the ample liquidity in GCC banking systems. Deposits are continuing to grow, though in some cases more slowly, and interbank lending rates are near multi-year lows.

So for many companies in the Gulf, it’s still a borrowers’ market for loans — credit is easily available at rock-bottom rates. The exception is small firms that do not have the advantage of shareholding links to governments.

They are finding it increasingly difficult to borrow and when they can secure loans, banks are demanding tougher terms such as more collateral, stricter documentation and shorter tenors, bankers and businessmen say.

“They are tightening credit lending norms because of the overall impact of low oil prices and the consequent freeze on oil industry capex-heavy projects...” said Dubai-based Vikram Venkataraman, managing director at Vianta Advisors.

Lending to small and medium-sized enterprises (SMEs) is only a tiny part of banks’ business; in 2010, SMEs accounted for about two  per cent of GCC banks’ loans, according to a World Bank study. SMEs rely heavily on other funding sources, such as non-bank financial companies.

But what’s happening with SMEs could eventually become a trend for the wider corporate sector. And since SMEs account for much of the job creation in the GCC — they are officially estimated to employ over 40 per cent of the workforce in Dubai — their fate matters.

Banks are still lending generously to bigger borrowers. The volume of new syndicated loans in the Middle East during the first quarter of 2015 doubled from the previous quarter to $23.25 billion.