GCC’s SMEs are inefficient for low GDP share

Small and medium enterprises (SMEs) in Gulf hydrocarbon producers have remained relatively inefficient given their low contribution to the domestic economy despite their large number, according to Saudi Arabia’s largest bank.

While they constitute one of the main elements in the region’s ongoing economic diversification programmes, SMEs are facing many obstacles, mainly funding and the fact that they are heavily reliant on expatriate labour.

“Typical Gulf SMEs are relatively inefficient. Their share of employment is far greater than their share of GDP, highlighting the limited value added contribution made by most of them,” National Commercial Bank (NCB) said in a study.

“This state of affairs suggests that the growth potential of individual Gulf SMEs is typically limited. Most of them are trapped is a low-efficiency and low-growth equilibrium. They tend to have limited access to credit and capital and the opportunities posed by retained profits are modest.”

The study, sent to 'Emirates24|7', said that even as much of the public debate in the six-nation Gulf Cooperation Council (GCC) is focused on creating new companies, there is little to suggest that regional economies significantly differ from the rest of the world in terms of the numerical SME dominance of the corporate sphere.

It said that in some GCC economies, most notably Bahrain and Oman, SMEs represent more than 99% of the total number of active enterprises and their share elsewhere is typically in excess of 90%.

“The broader economic weight of Gulf SMEs fails to match their numbers, however.

Neither the employment nor the GDP contribution of Gulf SMEs is comparable to their proportion of the number of companies,” NCB said.

“The overall share of SMEs in the Middle East-North Africa region is estimated at 71 per cent of employment but only 28 per cent of GDP.”

Citing Bahrain, the study said the GDP share of SMEs is 28 per cent while they are responsible for 73 per cent of all private sector jobs.

In Dubai, SMEs are estimated to make up 95 per cent of the total number of enterprises, 42 per cent of the workforce, and 40 per cent of GDP.

Saudi Arabia’s SMEs are responsible for approximately 40 per cent of jobs in the country, although some estimates put the figure even lower, NCB said, adding that their GDP contribution is estimated at 28-33 per cent.

The report showed SMEs provided the highest job ratio in the UAE, accounting for nearly 86 per cent of the total employment in the private sector.

“This SME gap is one of the defining characteristics of SMEs in the GCC and represents an important policy challenge both in terms of fostering innovative entrepreneurship and enabling existing companies to grow and create more jobs.”

NCB said the heavy focus on relatively low value-add activities, mainly trading and contracting, has meant that Gulf SMEs are relatively unimportant from the perspective of innovation, something that represents another major economic opportunity in view of global experience.

“This state of affairs is to an extent reflective of the fact that the GCC economies still tend to be at the resource-intensive, rather than innovative stage of development. Moreover, the necessary policies to prioritize education and training are relatively recent in origin,” the study said.

“But part of the problem is clearly linked to the relative absence of policies designed to foster innovation, something that is beginning to change, potentially quite quickly.”

The report said SME growth in the GCC, which controls over 40 per cent of the world’s proven crude deposits, faces many challenges, mainly funding, heavy reliance on foreign labour, training, regulatory support and operating environment.

It said that in Bahrain, nationals account for only 14 per cent of SME employment, while the Saudi private sector as a whole is some 90 per cent.

This is a reflection of the continued heavy reliance of the regional private sector on low-cost imported labor in the service sector, construction, and manufacturing.

“As for finance, a large and growing number of surveys on Gulf SMEs have fairly consistently identified funding as a key constraint. Historically, SMEs have tended to come into being relying on the financial resources of an individual or his circle of family and friends and the range of options beyond this remains limited,” it said.

It cited the World Bank as saying in its recent Financial Access and Stability Review that only around two per cent of GCC bank loans currently go to SMEs.

The World Bank also estimates that only some 20 per cent of SMEs in the Middle East have a bank loan or a line of credit, a lower proportion than in any other region in the world apart from Africa, according to the report.

Internal finance provides 85% of the funding of Middle Eastern SMEs, as opposed to seven per cent from bank finance and three% from trade credit, it said.

“Apart from bank credit, other typical forms of SME funding by global standards, such as leasing, remain very underdeveloped, partly for cultural reasons…. 

Addressing this funding limitation has been the primary focus of new SME-related policy initiatives in the GCC,” NCB said.

“However, there are currently still very few dedicated funding institutions for SMEs. While efforts to foster company development are led by government-related entities offering subsidized or guaranteed loans, a number of private and philanthropic institutions have also become involved in the efforts. Moreover, some initiatives now also seek to foster the growth of successful SMEs with a track record through preferential access to credit.”

The report referred to the recent partnership agreements signed between Dubai’s Department of Economic Development and several banks to help the top 100 SMEs in the emirate. It said that the proposed SME law in the UAE law would further assist small companies by, among other things, requiring public sector entities to make some of their purchases through them.

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