Small and medium enterprises (SMEs) in the UAE have been stifled by lack of funding although they account for nearly 94 per cent of total projects in the country, according to a senior official.
The problem could be tackled once a new law regulating SME activity in the country is issued by the Ministry of Economy, which says the law is expected to stimulate domestic business and attract more foreign capital.
Addressing a seminar on SMEs on Tuesday, Mohammed Omar Abdullah, undersecretary of the Abu Dhabi Department of Economic Development, said SMEs in Abu Dhabi account for nearly 94 per cent of total non-oil projects and as high as 97 per cent of the emirate’s non-hydrocarbon industrial ventures.
“But these projects are facing several obstacles that are hindering their growth and expansion and this is depriving the country’s economy from benefiting from these vital projects,” Abdullah told the seminar in the Capital.
“The main obstacle is the shortage in financing facilities for these projects, the poor link between them and large industrial projects, their low competitiveness and lack of proper rehabilitation and training programmes in this field.”
Abdullah said recognition of such obstacles is the “first step in the right direction” to tackle them and allow the SME sector to start growing.
He said experiences from other countries show that the problems facing SMEs are caused mainly by the fact that they operate separately and individually.
“There is a pressing need for these projects to interact…this will help overcome those problems and bolster their competition capability…in this respect, we should refer to the concept of ‘industrial clusters’, which are considered as one of the main pillars for economic development in the emirate.”
Addressing the conference on behalf of minister of economy Sultan bin Saeed Al Mansouri, a senior ministry official said they were working on a draft law regulating the SME sector, adding it could see light next year.
The ministry’s undersecretary Mohammed Al Shihi said the law would give a strong push to SMEs, encourage innovation and attract foreign direct investment.
In comments last week, Mansouri said the long-awaited SME law would be issued in the second half of 2011, adding that it would the creation of a federal body to coordinate SME plans and policies among the country’s seven emirates and supervise incentives offered for such projects in the first three years.
“We have completed drafting this law and it is now passing through its final stages…it will be discussed later by the legislation committee at the Ministry of Justice and I expect it to see light in the second half of next year,” he said.
“The new law is on part with similar laws in the European Union, Japan, South Korea and other advanced nations…..the incentives for such projects include government purchase of a specific percentage of their products.”
Mansouri said the new law to be enforced by the UAE, the second largest Arab economy, could be one of the first integrated SME legislations in the Middle East.
He said the Ministry had negotiated deals with some local banks to secure financing for such projects, adding that one local bank had already approved a Dh100 million funding facility for new SMEs.
“Under this law, federal and local government bodies are committed to giving part of their purchase contracts to SMEs,” the Minister said.
“It will enforce internationally-recognized criteria regarding SME activities through a commission to be created for this purpose….these include the definition of SME’s capital, workforce, revenue and other specifications.”
In a study released recently, the government-controlled Emirates Industrial Bank (EIB) proposed the creation of banking units which are specialized in providing funding for SMEs as they are facing obstacles in getting financing on the grounds that they are a high-risk sector. Given their significant role in domestic development because of their large number, the country should facilitate the creation of more SMEs, mainly those which are export-oriented and less-reliant on labour, it said.
"Bank financing is usually their only option, and is the predominant source of external financing for most SMEs. However, banks consider SMEs to be relatively high risk, which on the one hand impedes their ability to obtain funding, and on the other leads to the charging of higher interest rates," it said.
"Commercial banks are keen on business which meets the working capital needs of businesses, but less on business to finance SME start-ups. Thus, there is a need for dedicated banks, working on commercial principles but devoted to financing of the setting up of SMEs. Currently, not only the UAE but the entire GCC region lack institutions which specialize in funding SMEs."