Bank lending to SMEs is lowest in the Gulf

The share of bank lending to small and medium enterprises (SMEs) is only 2 per cent of total bank lending in the Gulf compared to 14 per cent in the non-GCC countries, According to the findings of a survey released by the UAE’s Ministry of Finance (MoF).
The ministry therefore called upon UAE banks to increase their level of lending to the sector.

The  joint survey of Union of Arab Banks and the World Bank on 'The status of bank lending to SMEs in the Mena region’ found that  banks in the Mena region lend only 8 per cent of their total loans to the small scale sector.

“Reflecting the characteristics of concentrated oil economies that are dominated by large enterprises, appreciated exchange rates and small non-oil sectors, SME lending is only 2 per cent of total bank lending in the GCC while in non-GCC countries it stands at 14 per cent,” the survey said.

Some GCC banks maintain a level of SME lending at 5 per cent but the maximum is at 10 per cent. These levels are substantially lower that in both the developing and developed countries and are below the banks' own long range lending targets which stand at 12 per cent in the GCC.

The study also revealed that though SME lending is not dependent on the size of a bank, banks with larger branch networks have lent more than others underlining the importance of relationships in transactions.  As much as 87 per cent of GCC banks have SME clients and the only a few have separate unit to manage the SME business. It counters the conventional view by revealing that large banks are as attracted to SME lending as smaller banks and that relationship lending by small banks does not dominate this segment.

From the SME point of view, only 20 per cent of SMEs in the Mena region have a direct line of credit or loan and only 10 per cent of their investment expenditures are financed by a bank loan.

"Though GCC banks regard the SMEs segment as potentially profitable, there has not been a concerted effort to encourage lending to them and diversify the financial infrastructure,” said Khalid Ali Al Bustani, Executive Director for the International Financial Relations Sector at the Ministry of Finance.
 
“Lending to large corporations is reaching saturation levels and SME lending can enhance bank returns with higher cross selling of financial products and decrease their risk profile. It is especially important in the UAE where we have increased the size of our non-oil economy year on year. In addition, we need to see many more GCC nationals move into the SME sector and start new businesses rather than contemplating only public sector jobs."

The survey states that banks cites the lack of SME transparency and their weak financial infrastructure that includes weak credit information, weak creditor rights and collateral infrastructure as the main obstacles for increasing their SME client base. Interestingly, excessive regulation and interest rate controls, excessive competition and weak demand for loans in the SME segment did not rank high amongst the deterrents from SME financing. Banks also reported problems in registration, enforcement and selling of collateral, especially moveable collateral.

State-owned banks have the almost the same SME lending levels at 11 per cent of total lending as private banks but private banks have better lending strategies and technologies. This leads to state-owned banks taking greater risks as they are less selective in their strategies to target SMEs. State-owned banks have a lower ratio of collateralized loans and a higher share of investment lending in total lending to them and have lower numbers of dedicated SME units and make use of credit scoring and stress tests.

While GCC banks adopt stricter selection criteria for engaging SME lending, they perceive SME lending as riskier that that for large corporations and housing and less than half of them have developed internal scoring ,models to assess risk of current and prospective clients and very few use automated application processing.

"A clear implication for banks from the survey is that they can have a lucrative business by financing expansion needs of SMEs through special schemes. Special schemes that target SME lending have proved popular and there is evidence that they raise lending levels, but banks need to come out with more such schemes that are cost effective. This sector of the economy needs special attention as it has the potential to grow the economy at a faster rate than it is at present and take us further up the V-shaped recovery that we are seeing. The implementation of a credit bureau in the UAE will undoubtedly encourage the banks to lend more and to newer SMEs creating wealth not only for the business owners but also for the UAE. The extent of government commitment to banks was demonstrated by the capital injection made during the height of the economic crisis and we continue to back them as they increase lending levels,” he said.

In terms of financial products, almost all GCC banks offer loans, deposits, cash management accounts, trade financing and payments and transfers but actual SME uptake is higher for current accounts and payments rather than for loans and trade finance. However, only 19 per cent of GCC banks offer insurance, 31 per cent offered leasing. 58 per cent of GCC banks use point of sale such as ATMs and mobile branches for SME services such as payments, transfers, withdrawals and deposits.

Fifty-nine per cent of GCC banks offer Islamic finance and a further 32 per cent intend to provide Shari'a compliant products in the next 12 months implying that 91 per cent of GCC banks will be involved in Islamic finance by the end of 2011. Almost all Islamic banks offer Murabaha (cost plus) financing while Ijara (leasing) is the next most popular type of Islamic finance route.
Only 13 per cent of GCC banks have specific offerings that target female owned businesses with 22 per cent of loan officers of GCC banks are women.

"The bouquet of products and services offered to SMEs needs to be expanded if banks intend to play a larger role in SME financing. This is clearly in their interest and in the interest of economic development. Banks need to communicate their SME offerings better outwardly so that they drive uptake of the products and services that exist and at the same time strengthen their internal risk management systems through adoption of recommendations such as Basel II."

The survey covered 139 banks in the Mena region in 16 countries of which six are from the GCC. Respondents included 76 domestic and 34 foreign banks, 29 state banks and 110 private banks.

Each bank was asked to provide their own definitions of SMEs in terms of employees and turnover. The average minimum number of employees of an SME was three in the GCC and the average maximum number of employees is 90 for the GCC. The average minimum turnover that defines SMEs in the GCC was $61,000.

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