New law and green shoots give hope to SME sector

The UAE Government has completed a draft law for small businesses modelled on existing legislation in Japan and Europe and aimed at boosting funding from banks and foreign investors.

Sultan al Mansouri, the Minister of Economy, said the moves to establish healthy growth among small and medium enterprises (SMEs) would be critical in "establishing a knowledge-based economy" alongside the country's export of petrochemicals.

The Ministry of Economy had previously called for banks to inject more cash into small businesses, after figures from the World Bank revealed that the SME sector received only 2 per cent of banks' lending in the GCC.

The Ministry is seeking recommendations on the draft law, Mr al Mansouri said, giving no indication of when it would come into force.

He said the new law would be "in line with all the legislation followed in Europe and Japan" and would create better classification of the SME sector.

Mohammed al Falasi, the deputy governor of the Central Bank, said the Government would seek to increase the availability of loans to small businesses. Many businesses are forced to rely on consumer loans, which have a maximum value of Dh250,000 (US$68,064).

This would "enhance competitiveness of all sectors in general", encouraging the growth of small, nimble competitors to counter established rivals.

Attracting venture capital and microfinance lenders, alongside investment from government entities such as the Khalifa Fund, would play an important part in encouraging that growth, he said.

The Central Bank would seek measures to ensure that banks can reclaim their investments should a small company go bankrupt, Mr al Falasi said.

Rates of recovery for creditors from an investment in a failed business in the UAE is about a third of the average in the Middle East, according to the World Bank.

"Many of the finance establishments have a reluctance in funding or financing such projects because the risks that are possible in not paying back their loans," said Mr al Falasi.

However, Mohamed Ahmed al Sarraf, the centre head of business banking at Emirates NBD, said green shoots were starting to appear within the SME sector, attracting banks.

"There's already growth in Abu Dhabi, due to consumption. Most SMEs are commodity companies, especially in Abu Dhabi."

He said another cause for optimism was that the construction sector, in which many small businesses operate, had stabilised in Abu Dhabi.

However, Janany Vamadeva, an analyst at HC Securities, said banks were still avoiding the SME sector because of poor asset quality.

One executive at a UAE bank, who asked not to be named, agreed the recession had left many banks seeking quality assets, such as government projects, leaving SMEs in the lurch.

"The balance sheets of most SMEs leave a lot to be desired," he said.

"Because the economy has been going through a bit of stress, most banks have taken a bit of a back seat in terms of lending".

ghunter@thenational.ae