The federal government is making a concerted effort to increase the contribution of small companies to the UAE economy by providing funding and making it easier to set up a business
Small businesses form the backbone of most of the world’s largest economies. However, their importance has to a large extent been overlooked in the Gulf, where public entities and large conglomerates define and dominate the business environment.
But this has started to change in recent years, as the UAE has identified as a key objective the need to move away from a hydrocarbons-dominated economy mainly run by the state towards an economy driven by the private sector. The UAE government is also increasingly looking to small and medium-sized enterprises (SMEs) to help create jobs for its growing population – 35 per cent of the UAE’s population are under the age of 24.
In employment terms, SMEs create 86 per cent of the UAE’s jobs and constitute 90 per cent of total businesses in the country by number. Yet their contribution to overall GDP remains low, at about 30 per cent, compared with 45 per cent and 67 per cent in the mature markets of the US and EU respectively.
“While their contribution to the overall performance of the economy is weak, if you look at non-oil GDP, the SME sector contributes more than 70 per cent in the UAE, better than the world average,” says Samir Pradhan, senior researcher at the Gulf Research Centre, a Dubai-based think tank.
Consequently, the UAE has been introducing reforms to make its business environment more attractive to start-up businesses.
According to the World Bank’s Doing Business 2010 report, which assesses a country’s business environment, between June 2008 and May 2009, the UAE made a series of positive regulatory changes. It has climbed 74 places to 44 in the rankings for the ease of starting a business, from 118 last year, and has risen 14 places in the ranking for the overall ease of doing business, from 47 to 33.
One of the UAE government’s key reforms came in August 2008 when it scrapped the law requiring start-up companies to have at least $40,000 in the bank. The UAE government is currently drafting a competition law intended to combat anti-competitive practices, and is considering revising its Investment, Industry & Company Law, which dates back to 1984.
The moves have been welcomed in the business community. “The recent government measures scrapping the minimum financial requirement for starting a business are really forward-looking,” says Pradhan.
Government efforts to support the SME sector have also resulted in the creation of several organisations to promote entrepreneurialism, such as the Mohammed bin Rashid Establishment for Young Business Leaders, which was set up in June 2002 with a dedicated $190.6m UAE fund, in conjunction with Dubai Islamic Bank, to provide loans at preferential rates to entrepreneurs.
Meanwhile, Emirates Bank provides financial assistance through its Al-Tomooh small business scheme, which was established in 1998. The total capital of the scheme is $27m, which is used to provide up to 90 per cent of the total cost of the SME projects. Total investment on one project should not exceed $545,000.
The SME division of the Dubai Economic Development department also runs a programme called Intelaq, which provides UAE nationals living in Dubai with a licence to start their business from home.
- 74 - Number of places the UAE has risen in the Doing Business 2010 report
- $88.3m - Value of loans made by the Abu Dhabi government’s Khalifa Fund
- 86 per cent - Proportion of UAE jobs created by small and medium-sized enterprises
The Khalifa Fund to Support & Develop Small & Medium Enterprises is another corporate body set up by the Abu Dhabi government to support and develop SMEs. Launched in April 2007, the fund has received a total of 3,500 applications and financed 199 projects with a loan value of about $88.3m. Loans are provided through approved banks and financial institutions, such as Union National Bank.
The fund provides support through three programmes: khutwa, which means a ‘step’ in Arabic and caters specifically for micro-finance; bedaya, which translates as ‘beginning’ and supports start-ups; and the zeyada or ‘increase’ programme, which provides assistance to existing SMEs looking to expand.
“We are much more than just a source of finance,” says Ahmed Khalil al-Mutawa, executive director of the Khalifa Fund. “We take entrepreneurs through all the stages – from evaluating the commercial viability o f their business idea to fostering the mentality of being an entrepreneur, providing the financing and the follow-up support once they have launched their business.”
The fund has three key criteria for selecting a business. The first relates to the nature of the project. Nearly all sectors can apply for funding, but there are exceptions, such as export or leasing projects, which are considered marginal activities and can acquire traditional financing from banks.
Second, the fund considers the financial viability of the project, to ensure it can recover any loan it might provide.
Third, the credentials of the entrepreneur are taken into account. “Is he or she hands-on, does he have both knowledge and experience in dealing with such projects and the capability to learn and move forward?” says Al-Mutawa.
To try to increase the chances of success, the fund also has 14 consultants who can provide advice to businesses. The fund also provides in-house training through its partnership with the UAE University and the Higher Colleges of Technology, the largest institution of higher learning in the UAE, with more than 16,500 students.
Seventy of the fund’s projects are now operational, with the remaining 129 in the process of being established.
Cirta Electromechanical Maintenance & Mr Pretzel are two success stories that have been backed by the Khalifa Fund. The fund provided entrepreneur Abdulla Tribeel with an AED1.8m loan to set up Cirta Electromechanical Maintenance, an air-conditioning duct company, which launched in January 2007 with three employees.
In June 2007, the company expanded its remit to include maintenance, in addition to manufacture and installation of air-conditioning ducts. The company now employs 95 staff across three offices and has a turnover of almost AED20m.
“Any institution can provide you with money but the most valuable thing we received from them was their business support,” says Tribeel. “The fund instructed all Abu Dhabi’s government departments to source 10 per cent of their air-conditioning ducting products from us, and we are now responsible for all government buildings in the entire western region of Abu Dhabi.”
Meanwhile, another entrepreneur, Hamad al-Shamisi, was given an AED800,000 loan to support his efforts to become the sole franchisee in the UAE for Mr Pretzel, a US pretzel retailer that has established more than 140 stores in nine countries over the past 14 years.
Al-Shamisi opened the first Mr Pretzel store in September 2007 and today employs 30 staff at four branches: two in Abu Dhabi, one in Al-Ain and one at Dubai Festival City. Al-Shamisi is currently in talks to open a store in Bahrain and one in Kuwait, with a long-term goal to open 15 stores by 2012.
“Normally the rent is extremely high in shopping malls,” says Al-Shamisi. “But the fund has stood up for entrepreneurial retailers like myself and demanded preferential rates for us to ensure that we can break even at the start.”
Despite its efforts, however, statistics provided by the Khalifa Fund show that one start-up in three did not survive for more than two years.
Two of the biggest hurdles for a young entrepreneur looking to set up a business in Abu Dhabi are the shortage of commercial space and high rents. However, the difficulty in securing financing is proving the biggest problem. A study by US consultant Dun & Bradstreet shows that UAE banks generally reject 50-70 per cent of credit applications from SMEs due to the risks involved and applicants’ failure to meet loan conditions.
These problems have only intensified in the current financial climate, with the UAE slipping three places in the Doing Business 2010 rankings for the ease of getting credit, from 68 in 2009 to 71.
“With tighter credit conditions in the Middle East, SMEs are finding it even tougher,” says a report published by UK bank Standard Chartered in September. “Applications for unsecured loans – which SMEs usually get – are at a disadvantage as banks seek collateral.”
Furthermore, SMEs are at a disadvantage relative to larger firms because they do not benefit from economies of scale. Therefore, improving access to funding for SMEs is imperative in the current climate.
“We are more than just a source of finance. We take entrepreneurs through all the stages”
Ahmed Khalil al-Mutawa, Khalifa Fund
“The government should facilitate public-private partnerships to spur the growth of SMEs and establish a dedicated fund as soon as possible,” says Pradhan. “Additionally, there should be clear guidelines for banks and other financial institutions for credit disbursement for SMEs, with viable incentives.”
However, ongoing regulatory reforms show that the UAE government is placing increasing value on the importance of the sector and that it remains committed to helping small businesses become a more central part of the economy.
In mid September, UAE Economy Minister Sultan al-Mansouri said that legislation allowing foreigners to hold 100 per cent ownership of businesses they establish in the UAE is expected to be submitted to the UAE Cabinet within two months.
Currently, foreigners must have a UAE national as a sponsor and are limited to a maximum 49 per cent stake, except in free zones.
The government is also addressing licensing procedures that have proven cumbersome. At the end of September, the Department of Planning & Economy signed an agreement with the Khalifa Fund that ensures exemption from fees charged by the department for issuance and renewal of business licences of projects supported by the fund.
Pradhan says there also needs to be a more well-defined strategy for growing the SME sector. “Because there are different organisations either directly or indirectly involved in supporting SMEs, there are no clear mandates,” he says. “Furthermore, there is a lack of synergy among the various programmes, which prevents them from having a major impact across the UAE economy.”
Clearly, the role of the SME sector in the UAE’s economy is set to increase in the coming years. The proliferation of small businesses will foster competition and help create a stronger and larger private sector. If the UAE is serious about diversifying its economic base, it needs to continue to prioritise the role that SMEs play and remove the hurdles that are currently prohibiting their growth.
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.