Economic pressure created by the coronavirus pandemic in the United Arab Emirates has put additional focus on banks' low levels of lending to small and medium-sized enterprises, though a new credit guarantee scheme in Abu Dhabi is expected to boost lending in the emirate.
A survey of SMEs found many expected business closures this year, while payment data from Visa Inc. found that more than 80% of businesses had their revenue negatively impacted. Loan relief has been one of the country's main support mechanisms for businesses and private individuals affected by the economic impact of the coronavirus, as part of a package from the UAE Central Bank worth 256 billion dirhams. Other measures include reductions in business fees including trade license costs and the option to delay VAT payments.
However, many business owners told S&P Global Market Intelligence that they have long faced obstacles to accessing credit, including lack of interest from banks to lend, difficulties in navigating contact processes, or only being offering loans at high rates.
Scott Livermore, Middle East economist at Oxford Economics, said that while the UAE has improved its overall business environment — it ranked 16th in the World Bank's Ease of Doing Business survey in 2020, compared with 33rd in 2010 — SMEs still find it difficult to access credit.
Credit to SMEs stands at about 5% of total bank lending, in line with other countries in the region but below levels in many developed markets. SMEs make up around 94% of companies operating in the UAE and provide jobs for more than 86% of the private sector's workforce according to figures from the country's Ministry of Economy.
In April, the Abu Dhabi government announced a credit guarantee scheme for SMEs registered in the emirate, giving the likes of First Abu Dhabi Bank PJSC and Abu Dhabi Commercial Bank PJSC more of an incentive to lend to smaller businesses.
A similar scheme was already in place in Dubai, but is limited to SMEs that are at least 51% owned and operated by UAE nationals.
With SMEs in trading, manufacturing and services segments eligible, the credit guarantee scheme has made SME lending "significantly more attractive" said Mahdi Kilani, head of business banking at Abu Dhabi Islamic Bank PJSC.
"The program, which secures a large portion of the financing program, ranging between 50% and 80%, has also helped us to free up further capital, as we have seen a reduction in the required regulatory capital threshold, improving our liquidity and financing capabilities," he said.
Livermore said that while "the right kind of policy measures are being put in place to bolster SME lending, there is also a supply-and-demand aspect."
"There's infrastructure within banks which are not typically geared up to that. And equally on the SME side, given they've typically not had much access to credit from banks, how strong will the take-up be?"
Banks outlined a number of factors that have put off many lenders from scaling up SME lending.
Inadequate financial management, a lack of security or collateral for finance, and the fact that "a large number of small business tend to be led and operated by one individual in what looks like a 'one-man show,'" make it difficult for lenders to entrust these businesses with significant loans, said Kilani.
With close to 90% of the country's residents foreign nationals, that creates a risk that is "very peculiar" to the UAE, namely skip or flight risk, said Rohit Garg, head of NEOBiz, an SME-focused digital banking brand that is part of Mashreqbank PSC.
In 2015, a year when many banks sustained losses in the SME loan sector as the collapse in oil prices impacted the economy, small business owners skipped the country with unpaid debt worth as much as $1.40 billion.
Sam Corcoran, co-founder at Cander Group, a recruitment company focused on banking and fintech, said that despite sustained growth in the four-year-old business — it saw fivefold growth across 2019 — it has been unable to access finance. "We're not even on the radar with our Dubai bank," he said.
Banks will only consider offering trade financing to companies with annual turnover above 36 million dirhams, he was told, a metric that favors companies selling higher-value products and excludes many service-based business like his, which tend to have lower revenue but higher profit margins.
In one case Corcoran's company had outstanding invoices from several bank clients — including their own Dubai-based bank — but still the bank was unwilling to grant a trade finance facility. "There certainly doesn't seem to be an understanding of services-based businesses in terms of trade finance," said Corcoran.
Is tech the answer?
Apart from credit, SMEs can also have difficulties accessing a wider range of bank services, including account opening, impacting their ability to pay for services and invoice clients. In March, as part of its COVID-19 response package, the UAE central bank directed banks to process account opening for SMEs within two days.
NEOBiz was launched to streamline the account opening process for SMEs, said Garg.
"Our long-term vision for NEOBiz is that it enables customers to focus on their business and not banking," said Garg.
The platform is primarily geared toward providing current account services: Mashreq ceased unsecured lending to the SME sector, the bank said in a December 2019 report.
Garg said the bank continues to offer "a wide spectrum of lending products where the collateral is based on the risk level. We offer loans as well as working capital solutions to companies which fit the borrowing norms."
Other digital ventures are also joining the field. Emirates NBD Bank PJSC has said it will launch E20, an entrepreneur-focused digital banking brand, in 2020; in 2019 Anglo Gulf Trade Bank received a bank license in the Abu Dhabi Global Markets financial free zone.
David Murphy, managing partner, financial services EMEA and Asia-Pacific at Publicis Sapient, believes improvements around digital banking could help make SME lending more attractive.
Underinvestment by UAE banks in this area has created the opportunity for specialist SME lenders or for a larger bank to create a service with a "fundamentally different operating model and a much higher level of efficiency and leverage data to take better risks," said Murphy.
"You see that interest right now not only across banking institutions but also among financial investment institutions to enter this space and take advantage of some of these policy announcements," he said.
As of July 13, US$1 was equivalent to 3.67 dirhams.