Dubai’s SME sector poised for growth, but challenges remain

Although Dubai has emerged as the premiere hub for small and medium sized companies in the region, entrepreneurs still face many challenges when they are looking to start a business in the emirate.

Over the past few years there has been a steady rise in the number of SMEs launching new ventures in Dubai, and this segment has emerged as a vital part of the country’s economy. According to official statistics, the UAE has more than 230,000 small and medium-sized companies that contribute more than 40% to the country’s GDP, and employ in excess of 42% of its workforce.

Access to funding has long been seen as a major hurdle for entrepreneurs in Dubai, but banks in the emirate have been increasing their focus on SMEs following restrictions from the central bank on personal loans for individuals.

Banks also say they are seeing a rise in the number of entrepreneurs seeking loans to start new businesses and are planning to boost lending to meet the demand. “In terms of the number of people coming to open new accounts to incorporate a business, it has definitely gone up,” said Anand Nagaraj, head of product & marketing at Citi Commercial Bank in Dubai. “The economy in Dubai seems to be improving and as a result a lot more people are confident to venture out on their own.”

Nagaraj says Citi plans to make SMEs a priority this year, while noting that it is not just 20-somethings from the internet sphere who are launching new start-up companies in Dubai. “Of course that happens, but you also find a lot of mature entrepreneurs who know what they plan to do, have a business plan in place, and also have a few customers in line,” he said.

Other banks which plan to boost lending to SMEs include Emirates NBD, which after doubling its loans to the sector last year, expects to once again double its SME lending to up to Dhs1bn ($272m) in 2013.

Gulf Finance has also said that after lending more than a billion dirhams to SMEs in the UAE during the last 3 years, it aims to grow that amount three fold in the next three years.

Lingering challenges still impact sector

But while lenders say they plan to provide more loans to SMEs, the reality is that lending to small and medium size businesses remains tight in the UAE. A recent report by Dun and Bradstreet found that SME loans in the UAE are at around 4% of total bank loans, which is higher than most GCC countries, but low when compared to developed countries where SME loans are at over 15% of total bank loans.

According to Edward Roderick, Co-Chairman and Managing Partner at Envestors MENA, banks in the UAE face two challenges. “They have to comply with higher tier one capital holding ratios, so that means they have to put more of their own money on deposit. That means that they have to recall loans or stop making loans in the process. And they still have a lot of write-offs for outstanding issues associated with real estate, so the net result of both of these factors is that lending is very tight. If you were a bank and were doing a normalised risk analysis, then small to medium sized businesses are not where you are going to put that money,” he told AMEInfo.com.

Roderick also said he does not share the exuberance that many others feel about Dubai’s economy. He believes the emirate is benefitting from a ‘disproportionate optimism’ as a result of the difficulties that many other countries in the region are facing. Not only does Roderick feel that this rebound will be short-lived, he also cautions that only a few sectors are thriving at the moment.

“The travel and tourism area is doing better, thanks to Emirates, and its growth is also boosting the retail sector, but the underlying economy is still tough,” he maintains.

Roderick also says that while the Dubai government has taken a number of steps in recent years to boost the SME sector, many of these initiatives are aimed solely at Emiratis and do not help expats who are seeking to launch new start-ups.
He also argues that the best way for the government to kick start the SME sector would be to set up an industrial bank. Citing the UK’s enterprise investment scheme as an example, he notes that under that system, entrepreneurs who put in a hundred dollars get $40 of that back in tax relief. And in the event that the company fails, they get half the difference back, so out of a hundred dollars, they are only putting $30 dollars at risk.

“Since we don’t have any income tax in the UAE, the only effective way to do this here is to do matched funding. They need to do something similar here for non-Emiratis to really make this economy accelerate, especially those sectors that are not the usual culprits,” he said.