UAE mulls SME laws to lure capital

The UAE is in the process of drafting laws governing small and medium enterprises (SMEs) as part of an ongoing economic restructuring strategy designed to attract capital and ensure sustainable growth away from volatile oil prices, the country’s Minister of Economy has said.

Sultan bin Saeed Al Mansouri said the draft law would be presented to the federal cabinet for approval soon, adding that it would give a strong push to SMEs, a key element in economic diversification.

Mansouri, who was addressing a seminar in Dubai on Wednesday, said the new SME law would encourage innovation and woo capital into the UAE, already the second largest Arab destination of foreign direct investment after Saudi Arabia.

“This will strengthen competiveness in the UAE business environment and give a strong boost to the SME activity in the country,” he said in its comments, carried by the semi official Arabic language daily Al-Ittihad on Thursday.

“We are now putting the final touches on the draft law, which will be presented to the cabinet shortly… the law largely encourage innovation in the UAE,” he added without giving details of the new law.

The UAE is already locked in a drive to diversify its economy by attracting investment and encouraging industrial projects, seen as a key factor in diversification given the country’s limited  farm potential.

The country is also planning to issue laws giving bigger access to projects by expatriates.

According to the government-controlled Emirates Industrial Bank (EIB), the UAE has around 208,000 SMEs, accounting for nearly 80 per cent of the country’s total companies.

It said SMEs form the backbone of any economy and this makes them critical for the process of development and growth.

In a study released recently, EIB proposed the creation of banking units which are specialised 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 lack institutions which specialize in funding SMEs."

Besides funding and other facilities, an index needs to be set up to serve as a benchmark for SMEs in the country, the study said.

"Some benchmarks should be established, not for the entire population of SMEs, but SMEs by each individual business sector. There is a need to create a sector-wise SME Index to establish the role of SME enterprises. This index could even be based on different definitions," it said. "Currently, there are several definitions of SMEs used worldwide which vary considerably, not only by threshold but also by the criterion. The SME Index can be simply calculated as the number of SMEs in proportion to total enterprises."

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