The small to medium-sized enterprises (SME) sector, which constitutes about 85 per cent of the total business in the UAE, is expected to get a boost following the abolishing of the minimum capital requirement of Dh150,000 for setting up a limited liability company (LLC).
According to a decree issued by President His Highness Sheikh Khalifa bin Zayed Al Nahyan, Ruler of Abu Dhabi, the amendment, retroactive to companies established on or after June 1, 2009, allows new businesses to determine the capital required for their establishment and sustainability. LLCs form a majority of the SMEs in the UAE.
According to industry analysts, the move would boost growth in the SME sector, which contributes almost one-third to the UAE's gross domestic product.
Sultan Sooud Al Qassemi, Chairman of Young Arab Leaders, UAE chapter, said: "Eliminating the minimum capital requirement makes it possible for many entrepreneurs to launch their ideas with one less problem to begin with. I believe abolishing the minimum capital requirement would encourage the setting up of many more enterprises in the country."
Appreciating the move, Hatem Samman, Director and Lead Economist, Booz & Company Ideation Center, said: "Having less obstacles is definitely a positive thing. We cannot underscore the importance of SMEs for the UAE. Abolishing the minimum capital requirement would definitely provide a fillip to the sector."
According to estimates, globally SMEs contribute almost 50 per cent to the world's GDP and 85 per cent to employment.
A research by Dun & Bradstreet on SMEs, conducted earlier this year, says Dubai and Abu Dhabi lead the charge in terms of sheet number of such enterprises.
"The UAE Government has been pursuing a strategy of active economic diversification, thereby increasing focus on private sector, including sectors such as services, finance, trading, tourism, real estate etc. This has led to an increasing role of SMEs in the UAE economy over the years," said Pawan Bindal, Associate Director, Dun & Bradstreet.
In Abu Dhabi, as per 2005 data (Abu Dhabi Vision 2030), SMEs constitute about 58 per cent of all private sector employment. Further, SMEs in Abu Dhabi contribute about 46 per cent to non-oil GDP, and about 24 per cent to overall GDP.
In Dubai and the Northern Emirates, SME contribution may be higher due to reduced dependence on oil, said Bindal. Abolishing the requirement for minimum capital for setting up LLCs eases a significant regulatory hurdle, he added.
"It will encourage entrepreneurs to set up new businesses in the UAE. By encouraging SMEs, the region would stand to accelerate the process of economic diversification, since SMEs form the backbone of multiple sectors including trading, manufacturing, construction and services. Growth in the SME sector would also imply sustainable economic development and form a crucial source for employment," he said.
"A competitive SME sector also forms the ideal platform for creativity and innovation. The UAE Government has also taken major steps to encourage entrepreneurship among Emiratis through various programmes including provision of seed funding for SME projects. This would help increase participation of UAE nationals in the private sector, a major goal in the federal strategy."
In spite of their significant contribution, SMEs continue to face numerous challenges in terms of high start-up costs and access to capital. The sector faces numerous other issues such as high costs in terms of registration fee and rentals, said analysts.
"Expenses such as registration fees and rentals are just part of a vast number of issues that all businesses face. There are many pressing issues that need to be addressed when it comes to SMEs," said Al Qassemi. "Better access to capital is one issue, which can be resolved by both public and private stakeholders. Banks, government agencies and private business all can play a part."
The Dun & Bradstreet survey pointed out that high cost of unsecured borrowing, high loan rejection rates and information asymmetry were among the major impediments to growth. According to the research, loan rejection rates were estimated to be in the range of 50 to 70 per cent.
"The UAE has been a favourable destination for SMEs given its position as a regional trading and financial hub. SMEs have been attracted to the country also because of its strong ports and logistics infrastructure, business-friendly laws and a growing consumer population. The most immediate impact of the economic crisis was the tightening of liquidity conditions and an overall decline in the availability of credit. Even in normal times, SMEs face difficulties in accessing finance, and the economic crisis did not help the situation," said Bindal.
Quoting the Dun & Bradstreet survey, he said more than 50 per cent of SMEs had difficulty in accessing credit.
"Credit applications of most SMEs were rejected or they had to pay relatively high interest rates. This situation implies that aspiring entrepreneurs would find it difficult to start or grow their business, whereas SMEs in distress would have lesser chances of survival," said Bindal.
SMEs are more vulnerable to reducing margins, which they are facing in the present times as they have low financial buffer compared to large companies, he added.
The minimum authorised capital requirement may have been abolished, but that does not end the hurdles in terms of high operating costs and other factors the sector faces, said the analysts.
"High operating costs posed a major challenge to SMEs. Around two-thirds of those surveyed had cited high operating costs as a concern," said Bindal.
"However, inflation has subsided considerably in the UAE in the past few months, providing some relief to SMEs."
Dun & Bradstreet, while maintaining a positive outlook for the continued growth of lending to the sector, pointed out there are systemic challenges such as high risk premium for business-critical unsecured loans, wide information gaps between lenders and SMEs leading to high loan rejection rates. These factors continue to impede credit availability for SMEs.
"Apart from financial barriers, legal barriers should also be eased to facilitate the entry of new enterprises as well as to encourage the growth of existing business entities," said Al Qassemi.
Encouraging the SMEs would help the UAE tap into the immense potential that the sector holds, said the analysts.
"SMEs and micros are a major economic contributor to the UAE economy. They represent more than 90 per cent of the number of companies and a good third of GDP. However, if you compare that to other countries, where SMEs contribute up to 60 per cent to GDP, you will find that there is still a lot of development potential for SMEs," said Dr Alexander von Pock, Principal, AT Kearney Middle East.
"It cannot be emphasised enough how important SMEs are to the UAE economy. SMEs drive our economy and GDP. A strong SME sector will lead to a strong economy, and that is good for everybody," said Al Qassemi.
The issue of finance availability, the analysts said, is addressed both by the public and private sectors.
"Access to finance is a primary need. Typically, that finance will be provided by a mix of government-backed organisations and banks. The UAE Government has taken good steps in that direction. For instance, the Cabinet recently approved the creation of Emirates Development Bank, aimed at helping small businesses by Emiratis, while institutions such as the Khalifa Fund already exist. Besides financing and other financial services, banks can play a supporting role by publishing SME newsletters or establishing specific SME business forums for their clients," said Von Pock.
The SMEs in the region have the potential to meet the global competition successfully, said Robert Ziegler, Vice-President, AT Kearney Middle East.
"Some SMEs in the UAE can successfully compete internationally. We have undertaken a study of SMEs in the region and found some real gems," he added.
Among the many initiatives that can go a long way in giving a boost to the vital sector include creating a support system for local SME development.
"Government institutions such as the Mohammed bin Rashid Establishment for Young Business Leaders currently play an important role in developing local SMEs, but I believe a lot more can be done," said Al Qassemi.
"An infrastructure can be created where entrepreneurs have somewhere to go at any stage of their business. A one-stop agency for example, that entrepreneurs can go to at any stage of their business, even if they are actually still just writing up their business plan. This agency can provide them with sound advice, and the tools necessary to get their ideas off the ground. For existing entrepreneurs, the agency may be able to lead them to the proper channels for bridging loans or working capital."
Al Qassemi said Young Arab Leaders encourages entrepreneurs in several ways.
"As part of our initiatives, we invite successful entrepreneurs to give talks, and to share their experiences with students as well as our members. What I have found is that most of our local entrepreneurs are always keen to share their knowledge and views and may not always have the avenue to do this in a broad and effective manner," he said.
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