Against a backdrop of geopolitical and economic instability, the financial services industry has a crucial role to play in helping SMEs navigate a challenging climate. Beyond simple financing products, banks can support SMEs by providing a broader range of tools to enable them to flourish.
Acceleration in sight, but volatility remains
In the UAE, economic momentum took a hit in the final quarter of 2018 as oil price volatility returned. Nevertheless, growth in the non-oil sector remained steady in Q4, as reflected by PMI data, which suggests annual non-oil GDP growth in 2018 broadly matched the preceding year.
Dubai’s stock market posted its worst annual performance since 2008 with a 25 per cent fall in value, owing to oversupply and falling prices in the critical real estate market. By contrast, Abu Dhabi’s equities index performed fairly robustly. With a view to 2019, Dubai unveiled its annual budget on 1 January, which was broadly aligned with 2018’s record spending, with a continued focus on infrastructure investment ahead of Expo 2020.
This spending will supplement the largest federal budget in the history of the UAE. Despite prevailing uncertainty for the global oil market, the local economy would benefit from the implementation of VAT, fiscal stimulus both at federal and emirate level and the Expo 2020 infrastructure push—which is likely to buoy construction and tourism—the UAE should benefit from FDI inflows driven by investment reforms and business friendly laws designed to ease the cost of doing business.
Nevertheless, a global growth slowdown, driven in part by the ongoing US-China trade war, may continue to weigh on oil prices, while increasing volatility in financial markets could mar an otherwise rosy outlook.
SME finance can boost economic growth
SMEs are the backbone of the UAE’s economy, accounting for around 94 per cent of businesses in the country. The International Monetary Fund (IMF) estimates that improving access to finance for small and medium-sized businesses in the MENA region could boost regional economic growth by up to one per cent per year, while stimulating job creation.
In fact, increasing the contribution of SMEs to the economy is a key pillar of the UAE’s economic growth plans. The Dubai SME 2021 Strategic Plan aims to increase the contribution of SMEs to the country’s GDP from under 40 per cent to more than 45 per cent by 2021. In short, they’re part of the national agenda, but they will need to receive the financial support that is required for growth.
A changing regulatory environment
The UAE government has in the recent past implemented policies to boost economic growth by enabling businesses and entrepreneurs. Last year was a landmark year for the introduction of new policies, including granting long-term visas for expatriates, allowing residents to stay in the UAE for ten years or more and linking their residency status to businesses in the country.
Changes to foreign ownership regulations are also set to attract business owners, as recent legislative revisions allow full foreign business ownership outside of free zones. The government has taken a close look at the cost of doing business, reassessing business fees and other requirements such as a reduction in the cost of business insurance.
Furthermore, the recent implementation of bankruptcy laws has implications for banks and other institutions financing SMEs, mitigating the risk of lending to local businesses— mainly due to the reduced likelihood of skips and legal mechanisms for recovering loans.
Financing SMEs and Managing risks
Banks play a vital role in providing SMEs with the funding they require to grow and develop. But in the UAE, loans to SMEs account for only four per cent of total bank credit. By contrast, RAKBANK’s total SME loan book accounts for around 20 per cent of its lending portfolio, in light of a long-term strategic plan for supporting the SME ecosystem.
A commitment to the SME sector, during good and bad times, is essential in realising the economic potential that SME growth promises. Beyond simply lending, banks must strive to understand the businesses they finance and in doing so, develop products and services that suit their needs and minimise risk.
This can be achieved by, firstly, taking a more selective approach to customer acquisition and, secondly, by providing advice and support on issues that may create challenges for businesses, for example, the introduction of tax. In 2018, defaults among SMEs in the UAE reduced significantly in comparison to previous years.
RAKBANK’s provision for impairment in loans and advances decreased by AED 131.8 million due to lower payment defaults on auto loans, RAKfinance, SME lending, and in the commercial segment. There are tangible results to show that the efforts RAKBANK have made to de-risk certain parts of the business over the last few years have allowed the Bank to reduce provisions and improve the quality of its loan book, a result of both more cautious lending and a better understanding of the tools that SMEs require.
Fintech can enable SMEs growth
Both education and technology are well-known stimulants for SME growth, improving competition and driving economic participation. In this regard, banks have a role to play by working with business customers to develop technology that will support ease of doing business operations.
By adopting and applying financial technology (fintech), while aligning their interests with those of SMEs, banks can move away from simply being lenders, to becoming business enablers that help customers to grow via a range of products and platforms. Online banking is among the most obvious areas that allow busy owners managers to save time wasted in a bank branch, thereby improving their operating efficiency.
The more that can be achieved on a smartphone, the better. In the application of technology, a bank’s SME customers need to be front of mind, with access to a more seamless banking experience.
But banks need to go beyond online transaction options, to deliver cash management facilities, digital payments, receivable management solutions, and payment gateway solutions. If there is one thing that SME lenders should strive to achieve in 2019, it is to maintain momentum in the adoption of technology and fintech by working with the right technology partners to deliver services that go beyond the basics of business banking.