The development of small and medium-sized enterprises (SMEs) has emerged over the past five years as one of the most important areas of economic policy in the UAE.

Operating predominantly in sectors such as retail, services and light manufacturing, SMEs are a vital component of the UAE’s plans to develop its non-oil economy. The rapid growth of the UAE’s non-oil sector is stimulating entrepreneurship and business startup activity in the country, which in turn is creating new jobs and business opportunities. 

While the outlook for SMEs is strongly positive, small businesses in the UAE face tough competition

SMEs contributed more than 60 per cent of the UAE’s GDP in 2011, the latest data available, and today represent almost 92 per cent of the total number of companies operating in the country. More than 92 per cent of the UAE’s private-sector workforce is employed by the UAE’s 300,000 SMEs and the numbers are growing.

“The number of new and existing business licences and registrations has increased in the last year,” says Abdul Baset al-Janahi, CEO of Dubai SME.

Positive effect

Part of Dubai’s Department of Economic Development, Dubai SME is the government agency responsible for stimulating and nurturing business start-ups and SMEs in the emirate. And business is booming.

“Our Dubai SME Pulse [survey] for the fourth quarter of 2013 shows positive indications by SMEs in their future outlook,” says Al-Janahi. “The gradual pick up by the global economy, and the fact that Dubai has been selected to host Expo 2020, have had a positive effect on the economy of Dubai and the UAE as a whole. 

“More businesses are relocating to Dubai. Capital is flowing in, more new businesses are being set up in Dubai, trade is increasing, and the logistics, tourism and retail sectors are growing, particularly the air cargo industry.”

The key sectors driving SME growth in the UAE revolve around the service industries, such as trade, tourism, hospitality, retail and food and beverage services, and all are projected to grow “several fold” over the next few years, according to Al-Janahi.

While the outlook for SMEs is strongly positive, small businesses in the UAE face tough competition from larger entities that have more experience and lower cost bases.

According to Dubai SME’s quarterly SME Pulse survey, which includes feedback from 500 Dubai-based SMEs, the top challenge in all sectors is competition.

In early May, managing director of the Washington-based IMF Christine Lagarde warned that more needs to be done to reduce the dominance of large corporations across the region.

Speaking in Rabat on 8 May, Lagarde said: “The formal sector is dominated by a few large firms – either owned by the state or with strong connections to the state. They are often shielded from competition through a network of patronage and political proximity, reducing the incentive to innovate and stay competitive. As a result, very few firms in the region are in a position to compete on world markets.”

Typically, small businesses seek to differentiate their services from the established competition by focusing on the quality of their service, rather than competing on price. While effective, it drives up the cost of doing business and can reduce profit margins.

The cost of running a business is the major challenge facing most small companies and a particular frustration is the burden of red tape – the cost of government fees covering things such as trade licences and visas.

In Dubai, the feedback from the SME community through Dubai SME’s regular surveys has allowed the government to understand that simply helping to promote these businesses is not enough. Businesses also need help to become more competitive by giving them financial and commercial support through subsidies and ensuring that a set percentage of government business is steered towards the local SME community.

SME law

A proposed new federal SME law, promoted by the Economy Ministry, is set to be enacted by the end of July. The law aims to improve SMEs’ access to government contracts by requiring that all federal government entities award at least 10 per cent of purchasing, service and consultancy contracts to local SMEs.

Companies in which the federal government has a 25 per cent holding will be required to commit to awarding 5 per cent of contracts to SMEs.

The new law will also provide SMEs with exemptions from a range of federal taxes and fees, such as customs tax for equipment, raw materials and intermediate goods for production purposes. They will also be exempt from the need to provide bank guarantees for each new employee.

“[The new law] will help improve competitiveness of SMEs [in the UAE], create new job opportunities for UAE nationals and encourage them to work in this sector,” Economy Minister Sultan bin Saeed al-Mansouri said in a speech on 13 April.

The new law is aligned to the objectives of Abu Dhabi’s Vision 2021 strategy, which aims to provide more jobs to UAE citizens in the private sector through industrial diversification and decreased economic reliance on oil revenues. It also will strengthen an existing government procurement programme in Dubai, which, since 2002, has provided SMEs with AED1.5bn-worth ($409m) of contracts.

Access to finance is the other major obstacle facing SME’s and business startups in the UAE. Banks often require a collateral commitment from business owners before they agree to lend to them, which adds considerable pressure to a new business. As a result, SME’s often prefer to find equity funding from acquaintances or investors. Improving access to both banks and investors is, therefore, crucial to the development of the sector.

“Following the global financial crisis in 2008-2009, trade finance and debt funding became very difficult to obtain and perhaps this will still be an issue going forward,” says Ben Constance, partner in the corporate and commercial group in the Dubai office of law firm Taylor Wessing. “There could be some opportunity in the equity market, which appears to be quite buoyant at the moment. That could be in the form of private equity investors, such as venture capitalists.”

Financial backing

There is growing awareness that more needs to be done to involve the UAE’s financial institutions, in partnership with the UAE Central Bank, in supporting SMEs in the country through guaranteeing loans and overdraft facilities.

Some local banks now offer special programmes that take into account SMEs’ need to build up resources and provide products such as unsecured loans, working capital, and loans to finance commercial vehicles and construction equipment.

In April, Abu Dhabi Commercial Bank signed an agreement with Mubadala GE Capital to purchase an AED450m portfolio of asset finance loans for UAE-based SMEs.

“Banks are realising that providing loans to SMEs is an opportunity for them to diversify their risk,” says Rushdi Kikhia, a Bahrain-based partner at consultancy firm Deloitte & Touche Middle East. “Rather than having a portfolio concentrated on only lending to big players, they are increasingly seeking exposure to a larger and more diverse base of clients.”

Kikhia says there is also more positive activity from ‘angel investors’ – affluent individuals who provide backing for SMEs, sometimes receiving part-ownership for their investment .

“Especially after the financial crisis, it has been harder to gain the confidence of investors and secure commitments. But it looks like angel investors are again exploring opportunities in successful business plans, which may have higher reward factors. They may not put in millions anymore, but perhaps tens of thousands, which would be enough to further grow an SME,” he says.

The government is also providing financial aid through entities such as Abu Dhabi’s Khalifa Fund, which has financed about 250 projects with a loan value of more than AED400m.

Stock exchange Nasdaq Dubai is said to be considering further enhancements for SMEs that will improve access to equity investors. After lowering the market capitalisation threshold for new listings from $50m to $10m, the exchange announced in February 2013 that it is studying the possibility of creating a market dedicated to SMEs.

The creation of an active, SME-focused equity market could improve access to capital, allowing companies listing on Nasdaq Dubai to use the funds to expand their businesses.

Other forms of financing are also gaining popularity, including crowd financing, where SMEs can raise funds through online pitching to a wide range of investors. But to attract investors, companies will need to tackle problems such as the lack of a more formal organisational framework and lack of corporate governance standards. These areas are often underdeveloped in smaller businesses.

“While many SMEs may be doing well from the commercial perspective, Dubai SME aims to remind them of the need and opportunities for upgrading capabilities through partnerships and joint initiatives,” says Al-Janahi.

“A good example is our corporate governance programme to help SMEs understand and embrace corporate governance as a foundation for sustainable growth. Having good governance will also help SMEs improve their access to external financing from banks and equity markets, as the credit risks are reduced with better information and transparency.”

According to a 2011 survey by Dubai SME and Hawkamah, a Dubai-based institute for corporate governance, the two greatest barriers to implementing corporate governance reforms are a lack of internal corporate governance know-how on implementation, as well as the unavailability of external qualified specialists in the region.

Corporate strategy

Hawkamah was commissioned to create a corporate governance code, which tells business owners the importance of holding meetings, formalising succession plans, defining a risk framework, and other activities.

“SMEs often need to work on their managerial capabilities as they tend to be startups led by one or two people,” says Kikhia. “But that can be developed and also allows them to be more flexible and agile, whereas larger corporations take a lot of time and effort to change their strategy. Lack of resources is also a big challenge for SMEs, whether that is human or technical resources.”

Around the world, business startups and SMEs have to overcome many barriers to growth, and the UAE is no exception. However, Abu Dhabi and other Emirati governing entities are committed to supporting this key community through a powerful array of initiatives and support institutions. As a result, the UAE’s SME sector is well set to grow strongly in the coming years, creating jobs and investment opportunities, and further diversifying the UAE’s economic base.