Small businesses in the UAE – traditionally ignored and dismissed as unprofitable – have in the past struggled to secure bank financing and make a go of it.
But the one-time economic outcasts now account for 80 per cent of the UAE's business economy and are turning the heads of banking giants eager to cash in on the lucrative start-up sector.
"The small and medium-sized enterprise (SME) sector is definitely huge here," said Raju Menon, managing partner at the UAE-based auditing and consulting firm Morison Menon Group. "It's one of the fastest-growing sectors in the UAE and contributes more than 30 per cent of the country's gross domestic product (GDP), including the contribution from the oil sector.
"If this contribution is excluded – if we consider the non-oil GDP – the contribution of the UAE's SME sector would be in the range of the world average, 70 to 80 per cent.
"That's the reason banks are more keen to catch up with the sector. Also, SME credit exposure is less than Dh10 million per unit, it's very low. It can vary from maybe Dh1m to Dh10m," said Menon.
Dubai First bank said the global spend by SMEs on business goods and services had grown by 14 per cent annually, with an estimated spend of $4.2 trillion (Dh15.4trn) in 2006. Any business with turnover of up to Dh100m can be categorised as an SME, and there are approximately 200,000 in Dubai, Abu Dhabi and Sharjah, the bank said.
Menon said SME profits could reach 10 per cent of turnover, which averaged between Dh40m and Dh50m. But he said higher overhead costs in the UAE had made small businesses much more difficult to run.
"Three to four years ago the position was totally different. Rent was only Dh70 to Dh80 per sq ft and it was easy to start a business as the capital required was low. At that time Dh300,000 was OK for one year whereas today the position has totally changed."
And UAE banks are adjusting to respond to the growing demand. The majority of business start-ups in the UAE currently need about Dh1m, Menon said.
"More capital is now required – you cannot look at any business start-up now for less than Dh1m. Also you need to have the market in your hand otherwise the Dh1m may not last six months."
Noor Islamic Bank (NIB), which launched in January, offers a profiling and rating service that aims to give credibility to customers who do not have credit profiles or balance sheets. The bank works with a group of partners to come up with an internationally recognised credit rating.
Ahsan Ali, head of SME banking at NIB, said: "What we have done is align our risk criteria with the rating. Traditionally with SMEs the problem is that when you walk in as a customer there's no credibility and banks are very reluctant to give out money, so it's very difficult to obtain financing."
He said that the one-size-fits-all approach adopted by most of the multinational banks was detrimental to start-up SMEs because of the very high interest costs involved.
"By cutting out the sales and administration costs we are able to offer a very competitive financing rate about 300-400 base points – three to four per cent, lower than anybody else in the market – for people who qualify under this programme."
HSBC, which has a market share of 12 per cent in the UAE, has significantly expanded its SME client base over the past five years after setting up a specialist unit in January 2003. The business banking unit applies a credit limit and turnover cut-off for its small business clients, who include shops, trading companies and small manufacturers.
Rakesh Arora, head of UAE Business Banking at HSBC Middle East, said: "The SME segment is quite important for banks as these companies will go through the business lifecycle from being start-ups to well established SMEs in few years and will eventually migrate to the mid-market segment when they can grow their operations and size.
"They are a natural feed for any bank's mid-market and large divisions when their size as well as financial needs grow over the years."
The bank, which opened a business banking centre in Sharjah last September to improve its support for small business, offers loans to companies that have existed for as little as six months and facilities to those that have been trading for two years. "In the past SME customers were handled alongside big corporate customers who enjoyed top priority at their expense," added Arora.
"In fast growing economies such as the UAE the SME segment growth is comparatively faster than the large corporates and it provides an opportunity for the banks."
Dubai First last month launched a business credit card in association with Visa International to cater to the region's SME sector.
The bank says the product is the first flexible-interest business credit card in the region and promises more flexible financing options for small businesses, including a flexible interest rate mechanism that offers the potential of the lowest interest rates in the industry. However, despite these upgrades to small services many successful fledgling businesses choose to turn to private investors rather than bank loans when starting up.
Dubai-based fashion and lifestyle firm Kitsch-22, which was set up in 2003 with Dh200,000 of capital, sidestepped bank financing altogether and instead relied on its owners' personal assets for funding.
Managing Director Saadia Zahid said: "I think primarily it was more difficult to take the bank route – even now five years into the business we still have a bit of a tough time getting bank financing and credit facilities."
Kitsch-22, along with its sister company 9714, last year had turnover of Dh15m. The firm, which has 35 employees, grew by more than 100 per cent between 2006 and 2007, and by 75 per cent the year before.
In 2006 Kitsch-22 won the entrepreneurial start-up award at Lloyds TSB's Small Business Awards.
However, Zahid said funding remained a challenge as it continues to build up its portfolio and diversify. The company has expanded from a fashion distribution, marketing and retail company and now incorporates other divisions including graphic design, brand management, nightclub entertainment and lifestyle services.
"Last year we grew a lot in fashion retail so we opened up three new outlets and it would have been great to be able to get a loan approved. But at the end of the day we ended up having to fund it privately."
UAE marches ahead
The UAE has taken 25th spot among 42 countries ranked according to business environment for start-ups by the UAE Global Entrepreneurship Monitoring Report.
The ranking is an improvement on last year's position of 41. The report, sponsored by the Mohammed Bin Rashid Establishment for Young Business Leaders and conducted with contributions from Zayed University, said the country has also moved up from 29th to 17th position in the number of start-up businesses that took off in 2007.
The UAE was also rated first in the list for hosting start-ups that have 25 to 75 per cent of overseas customers, in terms of export and re-export, resulting in the high global business activity ranking.
Mark Allen, Managing Director, Wet Fish Trading
"I started the business with a Dh700,000 loan from Lloyds TSB in February 2005. We built our factory and I began trading at the end of March 2005. I was looking to make a fresh start in my field of expertise in Dubai because I felt there was a hole in the market for decent fish suppliers.
"The lending here is very conservative, essentially for every Dh2 you borrow you put Dh1 down as security, so that was a bit of a culture shock. I had to secure the business loan against my own cash, but again it's better that the bank financed it rather than myself.
"You've got to weigh up what a venture capitalist would want from you as opposed to what a bank would want from you. I borrowed money, and at no time was my ownership of the business under threat.
"We've gone from a start-up in 2005 to having my wife and I and seven other staff. We're turning over Dh20m a year and I need support in that because the business is growing at 50 per cent a year.
"I firmly believe my company has raised the bar on the level of supply in my industry. Dubai and the UAE is a better place for companies like myself bringing a higher standard of product and procedures into the marketplace."