-Mohamad Hussein Mansour, PhD: Lecturer at the American University of Beirut, Lecturer at the Lebanese American University
-Rasha W. Fattouh: Instructor of Economics, Beirut Arab University, MA in International Affairs, Pennsylvania State University, MA in International Affairs, Pennsylvania State University, MA in Economics, American University of Beirut
Summary of Background:
- UAE is prioritizing SMEs, yet the progress is below that of the developed countries.
- SMEs contribute to 53 percent of GDP in 2019 increasing by 4 points from 49 in 2018, and 70.2 percent of the non-oil economy. While this share of the economy is significant, it is nevertheless lower than most developed countries
- SMEs in UAE represent: 94% of all businesses, 86% of the private workforce, 40% of productivity compared to large companies, 42% of total workforce, 53% of GDP, 70% of non-oil GDP.
- Retail trade is dominant when it comes to SMEs’ sectors in terms of employability, yet productivity in this sector is low.
- SMEs in the construction sector come second in terms of productivity, but perform better than the ones in retail trade when it comes to productivity vis-a-vis large enterprises.
- SMEs in the services sectors come in the third and fourth place in terms of employment, but are more productive than other sectors when compared to large enterprises in their sector.
- SMEs in the manufacturing sector are the least successful due to their relatively low productivity.
- Note: we can add a chart showing the relative productivity of SMEs in the major sectors versus large companies: Manufacturing (26%), Retail trade (39%), Hotels and restaurants (75%), Construction (101%), Profession, scientific and technical consultancies (113%), and real estate (115%).
- Several initiatives have been launched to finance and support SMEs in tens of billions AED, mainly targeting nationals.
Due to their immense role in the growth of national economies, small and medium enterprises (SMEs) have been at the center of attention for policy makers in both developed and developing countries. SMEs make up to 99 percent of total enterprises in most developed countries, more than 60 percent of employment, and more than 50 percent of GDP. In UAE, 94 percent of businesses are SMEs contributing to 53 percent of GDP in 2019 increasing by 4 points from 49 in 2018, and 70.2 percent of the non-oil economy. While this share of the economy is significant, it is nevertheless lower than most developed countries.
During the uncertain times and amid the recent global challenges, it is of crucial importance for the UAE to shift its economic reliance from an oil-dependent economy to a more modern-based one. This is indeed falling in line with the government’s agenda that is prioritizing the development of the SMEs sector. The government’s plans are reflected in the country’s visions and programs. In this regard, Vision 2021 launched in 2010 allocates particular attention to SMEs through the Executive Team for Entrepreneurship and SMEs. The initiative seeks to offer financial support to SMEs with preference to innovative industrial start-ups. Ghadan 21 is another program launched in 2019 as an AED50 billion three-year program focusing on economy, knowledge and community. The program consists of seven financial initiatives to support SMEs through reducing finance-related costs, facilitating ease of access to financing, as well as maintaining the resilience of the Abu Dhabi economy. Individuals and SMEs can obtain these benefits upon request to their respective banks.
SMEs thrived in different sectors, nevertheless some sectors were more successful than others. Based on different indicators, including employment and share of the economy, a number of sectors seem to be more competitive and efficient. Similar to the rest of the world and based on this criteria, retail trade seems to be the dominant sector in which SMEs in UAE were most successful. SMEs in retail trading employed more than 25 percent of all jobs offered by SMEs in the country with around 223,000 employees, which also accounts to 90 percent of jobs in retail trade. However, despite the large ratio of employees, productivity was relatively low reaching around 40 percent of the labor productivity of large companies operating in the retail sector. Following retail trade comes the construction sector, where SMEs in construction employ 150,000 employees, the second largest share of jobs in SMEs. Unlike in retail trade, SMEs in construction have roughly similar productivity to large companies in the sector.
Despite their relatively low employability, SMEs in the services sectors come in third and fourth place in terms of success due to their high productivity. In particular, SMEs in the law firms and consultancies, and real estate sectors contributed to 85 and 70 percent, respectively, of their sectors’ productivity. In comparison to the large businesses in their sectors, such SMEs were more productive by 15 points. The least successful sector for SMEs is the manufacturing sector. While SMEs in this sector ranked third in the number of jobs, they nevertheless performed poorly in productivity. SMEs in manufacturing contributed to less than 20 percent of the sectoral output and 26 percent of the larger companies.
In terms of regulations, SMEs in UAE enjoy a certain leverage as rules are not applied strictly to the letter, but are interpreted in a way to allow SMEs to grow. This is particularly helpful due to the complexity among SMEs. The government also supports SMEs through different financing schemes. For example the Khalifa Fund for Enterprise Development (KFED) in Abu Dhabi supports Emirati nationals in developing their new businesses. Similarly in Dubai, Mohamad Bin Rashid Establishment for SME also supports Emiratis in their business development. Other initiatives include the Saud Bin Saqr Establishment for SMEs and Ruwad – Sharjah Entrepreneurship Foundation among others.
Through the aforementioned government plans (Vision 2021 and Ghadan 21) tens of billions AED have been allocated to support the growth of SMEs. Furthermore, the National Programme for SMEs was established under Federal Law No. 2 of 2014, which is the executive arm of Small and Medium Projects and Enterprise Council, affiliated to the Ministry of Economy. Additionally, the government plans to further boost SMEs through the collaboration with OECD. In this regard, UAE’s Securities and Commodities Authority (SCA) announced a collaboration in 2018 with OECD and the Ministry of Economy to provide regulatory and legislative framework that involves the funding of SMEs.
Strengths of SMEs in UAE
1. High share of SMEs in jobs and in contributing to the non-oil economy
SMEs’ contribution to the economy in UAE is highly significant and is comparable to most developed nations. This contribution is mainly reflected in the high share of jobs in SMEs reaching 86 percent, and in the share in the economy reaching 53 percent.
– UAE ranks high among world nations in ease of doing business and in innovation.
In 2019 UAE was ranked by the World Bank as 11th in the world in terms of ease of doing business, ascending from rank 21 in 2018. In addition, innovation is a key characteristic of the UAE economy with innovation contributing to more than 30 percent of economic activity, locating the country among the 37 countries recognized by the Global Competitiveness Report of the World Economic Forum.
– Keeping up with the pace of technological evolution allowed UAE to widen its innovation landscape.
In this regard, experts agree that innovation is the main driver for the successful growth of SMEs in the Emirates. This is mainly driven by the evolution of technology and the ability of the country to keep up with the pace of this evolution leading to a wider innovation landscape. In this regard, the UAE was a pioneer in adopting technological advances during the early years of the tech revolution in the early 1990s.
– Cooperation between the banking sector and SMEs provides a strong support for these businesses, especially when it comes to finance.
One main support mechanism proving efficiency in UAE is the collaboration between SMEs and banks. In 2016 the Central Bank of UAE announced a five-year plan to “focus on supporting and encouraging the banking sector to finance small and medium enterprises”.
– The government’s initiatives (plans, visions, and programs) provide a safety net for SMEs and start-ups.
With the government’s determination to support them, as reflected by the various plans and programs, SMEs in the UAE have a guarantee to develop in a sustainable manner. This has been strengthened by the Ministry of Economy’s National Program for SMEs, seeking to empower SMEs in providing frameworks, guidelines, advisory, training, and technical and managerial support they require. All these initiatives demonstrate a strong will for the policy makers to enhance SMEs and new businesses provide a safety net for small and medium enterprises.
Weaknesses and Challenges
1- Relatively low support compared to other developed nations
While the share of SMEs in the UAE’s economy is high and comparable to developed countries, the SME sector still suffers from relatively low support. Since despite the different programs and initiatives by the government, SMEs are faced with the issue of underfunding vis-à-vis similar enterprises in other developed countries.
2- Lack of Finance
In a recent SMEs survey, more than 60 percent of SMEs rated lack of finance as their biggest challenge. For example, although SMEs make around 94 percent of all businesses in the country, lending them amounted for just 3.85 percent of total bank lending. This share is lower in both Saudi Arabia and Qatar that witnessed close to 5 percent and 5.3 percent, respectively.
3- Loans System
Furthermore, most loans to SMEs were short-term extending to no more than 24 months, limiting the ability for long-term investment for start-ups. Compared to the neighboring Qatar where a start-up can typically get an eight-year repayment period, loans in UAE seem less efficient.
4- Market Access
In addition, even with the retail and trade sector employing most jobs for SMEs employees, small and medium enterprises are faced with limited access to trade finance. For example, 50 percent of SME trade finance applications in the Middle East and North Africa (MENA) are rejected. When comparing with European counterparts, only 7 percent of SMEs in the European Union did not get acceptance for loans.
Further to the aforementioned weaknesses in the small and medium enterprises sector, SMEs are facing new challenges that can be summed into three categories: (i) rise of new regional competition, (ii) political instability and trade barriers, and (iii) Covid-19 pandemic and the blow to trade and services.
1- Rise of Regional Competition
When considering the share in the nonoil economy, UAE ranks first among GCC countries in the share of SMEs with 70 percent, compared to Saudi Arabia (66%), Qatar (53%), Kuwait (68%), and Oman (63%). However, in recent years neighboring countries, especially have been investing heavily in developing SMEs. The most efficient is the Kingdom of Saudi Arabia where SMEs constitute 99 percent of all businesses. In 2020 the Kingdom offered SMEs a financial aid of USD 13 billion to overcome the unusual circumstances and crisis, demonstrating significant dedication to supporting SMEs through the provision of financial resources. And while UAE’s SMEs have a higher share of GDP (53 percent) compared to Saudi Arabia (20 percent), Saudi Arabia seeks to increase the share from 20 to 35 percent as part of its Vision 2030. The Saudi Ministry of Labor alone is leading 38 initiatives to support SMEs. Nevertheless, the lower share of SMEs in Saudi Arabia is due to the higher reliance of the kingdom on oil. When considering
Moreover, while 50 percent of SMEs UAE are not being successful in getting trade finance, KSA announced the launch of Saudi Exim Bank to finance needs of SME exporters. Other initiatives to finance SMEs in the kingdom include SIDF and Kafalah (as SME loan guarantee scheme) have increased their focus and capacities to fund Saudi SMEs. In this regard, Kafalah has doubled its finance to 20,000 SMEs from around USD 2.67 billion to USD 5.34 billion in 2019. In addition to the government plans and to financial institutions in Saudi Arabia, other major organizations in the country like ARAMCO and SABIC are supporting SMEs by integrating them into supply chains. Other Saudi organizations have launched similar programs, including the King Abdulaziz City for Science and Technology’s BADIR technology incubator program and Saudi Credit and Savings Bank’s substantial loans to SMEs.
Supporting SMEs however is not limited to UAE and Saudi Arabia as every GCC country has launched programs to support SMEs. Qatar for example is working on developing a positive eco-system for start-ups and SMEs. Qatar is a major competitor in the SMEs sector especially with its investment in the Fintech industry. In this regard, the Qatar Fintech Hub was created offering co-working space, an incubator facility for start-ups, hackathon competitions to inspire entrepreneurs, and plans to establish a fintech accelerator in 2020. The Qatari Development Bank (QDB) has launched several programs in 2019 to support SMEs including a USD 63.1 million for 30 Qatari start-ups and another USD 100 million fund initiative. The Qatari Central Bank is also planning on developing a regulatory sandbox in 2020, which would act as a controlled test bed for innovative financial products that are new to the market. More recently, the CEO of QDB announced in February 2020 that fintech products will be provided to support SMEs.
Therefore, despite the higher share of GDP by SMEs in UAE, other countries are catching up and therefore challenging the comparative advantage that SMEs in the Emirates have enjoyed. Although such challenges are expected to raise competition and therefore improve the quality of work, if SMEs were not supported enough by public and private institutions, the advantages and privileges that were once offered by UAE and attracted foreign investment might become on the decline.
2- Political Instability: Barriers to doing with business with Iran and Qatar
Along with other GCC countries, the UAE went through diplomatic tensions with Iran in January 2016 and with Qatar in June 2017. While the diplomatic tensions with Qatar has led to the suspension of businesses, this was not the case with Iran, a major business partner. However, when it comes to Iran, the US-led sanctions on the Islamic Republic were the main driver for the deteriorating businesses and trade between UAE and Iran.
Business with Iran
Until mid-2018, the UAE was the third largest export market for Iran and had the second largest market share in Iran. The trade balance between the two is in favor of the UAE with imports from Iran accounting for 0.7 percent of all non-oil imports in UAE, while the exports from UAE to Iran accounted for 4.7 percent of all exports (and 6 percent of non-oil exports). However, due to the US sanctions the trade that reached around USD 19 billion in 2018 plummeted by half in 2019 as the Middle East’s business and finance hub suffered from restrictions. The reason for the decline of trade is mainly because of fear to breach US sanctions and because of the sharp stomp in Iranian riyals.
Since SMEs in retail trading is the dominant sector among SMEs, the deterioration in the bilateral trade between the two countries will directly affect those businesses. The plummet by half in commerce would have ramifications on the small and medium enterprises almost by the same share. In addition, as roughly 5 percent of the country’s imports are from Iran, and as Iranian businesses own around USD 300 billion in UAE, the slump in business between the two sides would affect the overall revenues of the country and therefore a hit to the overall funding schemes.
Business with Qatar
While the trade restrictions to Qatar originate from a different base, namely diplomatic tensions, the effects are similar to that of restrictions with Iran. The importance of the business relations between the two countries is reflected in the share of trade where 60 percent of Qatari trade is transited through the Emirates (and partially Saudi ports). On the other hand the exports from UAE to Qatar decreased from USD 2.7 billion in 2016 to almost zero in 2018, affecting all SMEs working in retail trading across the shared borders. Furthermore, many SMEs in both retail trade and services sectors were affected as they could no longer transport between the two countries.
3- Covid-19: Slump in oil exports and prices and repercussions on services and trade sectors
The Covid-19 pandemic poses the greatest challenge to economic growth since the end of the Second World War. The novel virus is moreover threatening the global economy as the world witnesses the second greatest depression since the 18th century, with the highest stump in global economic growth after the 1929-1933 Great Depression. For the UAE, this threat is multi-folded. First, similar to other countries, the Emirates is facing challenges in the trade and services sector as transportation and travel are restricted, internally and across countries. The country however has an additional economic challenge as it is an oil dependent country with one third of its GDP comes from oil revenues. As Covid-19 has lower economic activity and therefore the demand for oil, a steep drop in oil prices results hence lower the country’s revenues.
Table 1: Initiatives required and responses by different countries
|Business Costs||Stimulus package of AED 1.5bn to support SMEs affected by Covid-19. 20% refund on rent for tourism sector||Rent exemption for 6 months||Receive Zakat certifications with no restriction allowing continuing operation||Stop paying rent, water, electricity and gas bills.|
|Debt Finance||AED100bn package to ease short term relief on private sector loans & promote SME lending.||6 months of postponing loan repayments||$13bn to help SMEs cope with the pandemic & exemption from payment of fees until end of 2020||Liquidity releases in the amounts varying between EUR million 321-853|
|Employment Support||No Measures were taken||No Measures were taken||Online training courses on crisis management & specific sectors Allocation of SR2b by the Saudi Human Resources Development Fund for a 100,000 job seekers in private sector||Coverage of sick leaves & continued salaries for people who could not work. One-off 600 euros in self-employed & professional workers in tourism, agriculture & cultural sector workers.|
|Business Advice||No Measures were taken||No Measures were taken||Online mentorship & advisory sessions from community leaders & successful business owners on significant topics related to the crisis||Vouchers given to facilitate the purchase of laptops Allocations of EUR 4000 on consultancy services for SMEs to cope with the crisis|
|Tax||No Measures were taken||No Measures were taken||Postponement of income/VAT/tax/Zakat Payments||Deferrals of tax obligations by workers & companies Postponement of social security contributions|
When it comes to private businesses, SMEs are heavily affected by both oil shocks and by the restrictions on trade and services, as well as the harm caused by the increased expenditure on other sectors to react to Covid pandemic like the health sector. In terms of oil revenues, the oil shock that hit the world affected the UAE’s revenues which are indirectly used to support the funding of SMEs. When it comes to trade restrictions, with most SMEs’ jobs in retail trading, the businesses were severely affected as trade halted. Even in the services sectors, where SMEs contributed to 70 percent of the economic output and performed better than large businesses, the small and medium enterprises had to suffer from low productivity as the sector was interrupted by the pandemic-caused constraints. The services sector was the first to experience the damage as the authorities closed shopping malls, restaurants, and tourist attractions to limit the spread of the virus. Furthermore, as the UAE highly depends on foreign direct investment (FDI) and on expat personnel, the restriction of flights also affected the businesses led and operated by expat staff.
Nevertheless, the UAE government did not stand still as the pandemic tarnished the economies of the world. The authorities initiated a number of measures starting on April 24 when the gradual reopening of the services sector started. This was followed by measures to allow expatriate workers to travel from-and-to UAE. Even the tourism sector began receiving tourists from July 7. Today the services sector is operating at 80 percent capacity.
In terms of policies, the government advanced on two fronts, fiscal and monetary. On the fiscal front, the authorities announced around AED 26.5 billion (around 2 percent of GDP) in total. More than half of this amount (AED 16 billion) targeted private businesses through reducing various government fees and accelerating existing infrastructural projects. The second largest chunk of the amount (AED 9 billion) went to the Ghadan-21 project from the government of Abu Dhabi as a fiscal stimulus program. AED 1.5 billion from the government of Dubai was announced in measures to reduce government fees, provide additional water and electricity subsidies and simplify business procedures.
In addition to providing for water and electricity subsidies, the new initiatives provide credit guarantees and liquidity support for small and medium enterprises. Furthermore, the government of Abu Dhabi announced a reduction in a number of fees in the tourism and hospitality sectors to boost the services sector. The government of Dubai on the other hand cancelled a number of fines and tax provided tax reimbursements to hotels and restaurants.
While this initiative is beneficial for SMEs, the UAE did not match other developed countries in fiscal measures. For example, Italy’s tax response included both tax exemptions and tax deferral by workers and companies. These deferrals included VAT, withholding tax and social contributions. Saudi Arabia also supported the private sector by the postponement of VAT/excise/income tax/Zakat payments, and exemptions of government dues with USD 23 billion.
On the monetary and macro-financial front, UAE’s Central Bank (CBUAE) announced the reduction of its interest rate twice with a total drop of 125 basis points in 2020. The Bank also announced a package comprising of AED 256 billion (around 20 percent of GDP) in order to: i) reduce the banks’ reserve requirements from 14 percent to 7 percent; ii) AED 50 billion with zero interest rate collateralized loans to banks; iii) AED 50 billion allowing the use of banks’ excess capital buffers; iv) 15-25 percent reduction in provisioning for SME loans; v) increase of loan-to-value ratio for first-time home buyers by 5 percentage points; vi) limiting banks fees for SMEs; vii) waiver of all payment service fees charged by CBUAE for six months; viii) raising the limit on banks’ exposure to the real estate sector to 30 percent of risk-weighted assets, subject to adequate provisioning; ix) allowing banks to defer loan repayment till end-2020. Furthermore, on August 8 CBUAE announced further measures to facilitate banks’ lending to the economy: relaxation of the Net Stable Funding Ratio and the Advances to Stable Resources Ratio effective through end-2021.
As for SMEs, non-monetary support matters crucially. While the current economic measures seem well-developed, it is equally important to increase access to capital in the form of subordinate loans and equity-like instruments. These can include methods to facilitate the process of giving loans by banks to SMEs for a quicker and more efficient lending process during the crisis. This in turn can be done through the establishment of a national strategic fund that can act as an anchor for investors and lenders to the fund. Indeed, this would make the government as the main shareholder in the SME sector, yet it will have two major benefits for the sector. First, swift support will protect the economy by maintaining the highest level of employment possible in the absence of an income tax or social security system. Second, if capital is made widely accessible, in a timely manner and is structured to avoid the burden of additional debt, good companies will be in the best position to bounce back, expanding their operations and driving the growth that will repair the economic damage wrought by Covid-19.
Nevertheless, despite the many non-monetary initiatives and opportunities for SMEs to easily access loans, a challenge to avoid debt still remains. SMEs still cannot get monetary support with having to demand loans which pose higher risks on businesses that do not wish to be indebted. On the other hand, countries like the United States have announced a USD 60 billion relief fund to the Small Business Administration divided between USD 50 billion loans and USD 10 billion grants. Similarly, France released liquidity in the amount of Euro 312 million to support SMEs. Other countries like Italy and Germany initiated large scheme liquidity schemes of Eur 853 million and Eur 328 million, respectively. In Germany, the entire federal government was authorized to lend out as much as USD 610 billion to companies to cushion the effects of Covid-19.
In terms of fiscal measures, while the UAE lowered interest rates and allowed easy access to loans and lowered utility bills (stimulus package of AED 1.5 billion to Covid-affected businesses), the country did not exempt SMEs from rent. On the other hand, countries like France declared that SMEs facing difficulties would stop paying rent, electricity, and gas and water bills.
With regards to the unemployed SMEs during the pandemic, while the UAE did not address the problem, countries like France granted that unemployed people continue receiving their benefits and the confinement period would not be counted in the calculations of unemployment benefit rights.
When compared to regional counterparts, the KSA was more proactive in training and providing online data to businesses. The Kingdom increased labor training subsidies by launching online training courses on crisis management in general and sector specific areas. The UAE can use this experience during the pandemic and adopt similar initiatives on the long-term. Italy has also provided business advice. In this regard, the state offered vouchers to support remote business activities (e.g. purchasing teleworking service products). Similarly, Germany provided vouchers to support remote business activities with a Eur 4,000 assistance for SMEs to cover consultancy services. While this strategy can be simple yet significantly effective, the UAE did address it at all.
On employment also, other developed countries showed more advanced strategies to support employment. Italy for example allowed employees of companies who had their businesses interrupted at a benefit of 80 percent of the salary to be paid by the government. For self-employed workers, a lump sum of 600 euro, tax exempt was given to most of them. Employees in seasonal sectors like tourism, agriculture and are received the same amount. Other employees with an annual income under Eur 40,000 received 100 euros. On top of that, Italy also offered subsidies for sick leave, and allowed parents with children to take different kinds of leaves.
Similar to Italy, the Government of Germany also supported employees by paying the salaries and wages of those who could not work due to quarantine. Self-employed workers also received compensation of different types. In financing SMEs during the pandemic, Italy supported firms which needed to close or reduce their activities. This was through huge monetary transfer to small and medium businesses.
Lastly, while UAE did not reduce costs for companies that rely on imports, neighboring Saudi Arabia did. Saudi Arabia reduced import restrictions on intermediate goods. This included the postponement of collecting customs duties for 30 days with bank guarantee applicable for 3 months. UAE on the other hand did not address this aspect of business climate and business costs (it only addressed utilities and the reductions in rent/leasing only if the government is the landlord: Rebates (20 percent) on rental values for restaurants, tourism and entertainment sectors.
Summary of Weaknesses and Challenges
- Despite their large share, SMEs in UAE are suffering from underfunding
- SMEs suffer from short term loans and limited access to trade finance
- New challenges include: (i) rise of new regional competition, (ii) political instability and trade barriers, and (iii) Covid-19 pandemic and the blow to trade and services.
- Regional competition, especially in Saudi Arabia poses a challenge to SMEs in UAE. KSA is investing significantly in UAE, and in some sectors exceeding the financing of UAE.
- Qatar is another main competitor with its huge investments in the fintech industry.
- Regional competition might lead to the decline of comparative advantage of SMEs in UAE if not faced with enough financing. This would ultimately lead to the loss of privileges that were once enjoyed in the Emirates, hence to lower interest of foreign investors.
- The authorities have introduced large fiscal and monetary initiatives to support private businesses and banks amid the Covid-caused financial and economic crises.
- US sanctions on Iran, a major commerce partner for UAE, led to a drop in bilateral trade by half therefore crippling SMEs in the retail trading sector, and decreasing the overall income of the Emirates.
- The GCC blockade on Qatar affected the economy of UAE mainly through the trade between the two where Qatar depended heavily on transit through Emirati borders. The effect of the blockade was also on SMEs operating across the Emirati-Qatari borders.
- Covid-19 affected the Emirati economy in two ways: Restrictions on trade and services sectors, and a sharp drop in oil revenues.
- Additional non-monetary measures are necessary to support SMEs. These can include methods to facilitate the process of giving loans by banks to SMEs for a quicker and more efficient lending process during the crisis.
- While the UAE is a pioneer in supporting SMEs, it can learn from other countries’ experience. Other countries (examples above of the USA, France, Saudi Arabia) have taken fiscal and monetary measures to support SMEs.
While the UAE is a regional pioneer in developing SMEs, it is still falling short in facing a number of challenges, especially when benchmarked with a number of developed countries. These shortcomings are reflected in the response to Covid-19 which, despite its large intervention, could have been done in a more sustainable manner. Furthermore, the Emirates can improve its support to the SMEs sector to keep its comparative advantage amid regional competition and the restraining tensions on the country’s borders.
The opportunities to improve the support for SMEs includes both fiscal and monetary initiatives that take into consideration the needs of SMEs. In addition, attracting fintechs and enhancing “smart technologies” would allow the UAE-based SMEs to become more innovative and to compete regionally. In this regard, it is recommended that efforts should be made to diversify SMEs’ business platforms for online and virtual provision of services, which would in turn increase their chances of being more successful.
Other initiatives that the authorities can do would be on the entrepreneurial culture in order to incentivize the young generation. This can be done through providing certain packages to promising business proposals, and through providing data to small businesses and start-ups. Start-ups and small businesses can also benefit from free or low-cost advisory support from relevant stakeholders. Simultaneously, by focusing more on the more competitive SMEs would help in benefiting the overall economic growth by creating jobs and enhancing innovation.
While policy interventions are necessary for the development of the SMEs sector, there are certain measures that the authorities should avoid doing. These include the evasion of unnecessary subsidies and to give less focus to unproductive sectors when long-term investments are not promising.
While the government focused on two types of support, debt finance (delayed repayments, deferrals of payments and new lending) and business costs (utilities and rent/leasing), it neglected other types of support. These shortcomings include employment support, tax, business climates and business advice.
In this regard, the UAE should follow in the footsteps of countries like Germany, France and Italy who allocated funds for employees who lost their jobs or had to stay in compulsory quarantine. This should target employed, self-employed, and seasonal employees.
Similarly in terms of taxes, while the UAE reduced fees and provided subsidies for certain public services, the government can also act similar to European countries in exempting certain sectors from taxes and fees. France for example exempted SMEs from paying for gas, water, and rent. Similar to other countries, the UAE can also defer payment of tax to SMEs that can prove hard to survive in unusual circumstances.
Furthermore, UAE can adapt the French method of granting that unemployed people continue receiving their benefits and the confinement period would not be counted in the calculations of unemployment benefits.
The UAE can additionally allow for rent holidays especially for SMEs facing serious challenges due to Covid-19 and quarantine measures.
On the monetary front, while CBUAE is providing a number of initiatives, it still lags behind a number of advanced nations, especially in terms of providing non-loan benefits. The UAE can support SMEs by adapting monetary measures by the USA that has announced a relief fund of USD 60 billion to the small businesses and administration. France did similar measures by releasing liquidity in the amount of Euro 312 million to support SMEs. Italy and Germany had similar initiatives.
Implementation of such credit guarantee schemes would help SMEs avoid bankruptcy. Furthermore, such schemes would require further cooperation between banks and SMEs. The CBUAE should lead the arrangement of such collaborations in order to target the most productive and competitive SMEs.
The CBUAE already requested banks to allow for temporary deferral of payments, also reducing fees and commission. However, to enhance this, the CB may ask to even postpone loaning payments for SMEs to almost a year, a measure implemented by KSA that applied it for 1300 SMEs. This should be granted to SMEs with a history of profit thus proving their ability to stand on their feet again.
Attracting “competitive” businesses
In order to make the country’s efforts most efficient, there should be a focus on the most productive methods to enhance SMEs. In this regard, fintechs that promote innovation should be prioritized. Fintechs not only promote innovation, but can also be efficient in modern times as well as in times of pandemics. There needs to be an assessment of existing fintechs in order to provide certain fiscal and monetary benefits. Furthermore, as a number of foreign countries lead the world’s industry in fintechs, the UAE should attract foreign fintech FDI through giving particular privileges to foreign fintech SMEs.
Furthermore, support for competitive businesses should be based on the productivity of the sector in which SMEs operate. While productivity can be measured in different ways, it is suggested that authorities take into consideration three main indicators: employment ratio compared to large businesses, ratio of the sector to GDP, and the productivity of SMEs in this sector compared to large businesses. If one follows these indicators, the most productive sectors would retail trade, construction sectors, and specific fields in the services sectors.
For the retail trade sectors the government can reduce the import taxes, a fiscal measure adopted by several developed countries to support SMEs in difficult times, especially start-ups.
Advice and data to business, on pandemic and in general (gathering and providing)
Despite the different policy initiatives by the UAE to support SMEs, there has been no significant actions to reinforce the evidence-based activities of small and medium enterprises. Such information that would allow businesses to learn how “to do things”. The effects of such policies have shown efficiency in the Saudi Arabia, Italy, and Germany. KSA for example was more proactive in training and providing online data to businesses. The Kingdom increased labor training subsidies by launching online training courses on crisis management in general and sector specific areas. Italy has also provided business advice. In this regard, the state offered vouchers to support remote business activities (e.g. purchasing teleworking service products). Similarly, Germany provided vouchers to support remote business activities with a Eur 4,000 assistance for SMEs to cover consultancy services. While this strategy can be simple yet significantly effective, the UAE did address it at all.
Advice and training is particularly important for online work, especially for SMEs that do not typically depend on online work. Examples of some methods that can be adopted include conducting workshops, online mentorships and/or sessions from community leaders and successful entrepreneurs to educate SMEs more on how to handle difficult circumstances, and digitize their work. In this regard, one measure that was adopted by Germany and could be useful for UAE is to announce a fund specifically for SMEs to cover consultancy services to help find solutions to overcome difficult times of uncertainty.
Looking at international counterparts, in the KSA a recent law was passed to stress on the importance of government procurement from local manufacturers. This law gives preference to local SMEs and companies listed in the financial market in government purchases. Similarly, the UAE can pass similar laws that prioritize the collaboration with local SMEs which will create a more attractive business landscape that will encourage foreign investors to invest in SMEs.
Such regulation should focus on policies and mechanisms to prefer the local businesses, including the preparation of a list of products and services to be purchased from national suppliers. This should also include an online portal for local SMEs to apply for procurement. Most importantly, such regulations should give local SMEs a price advantage of a certain percentage compared to other foreign businesses. In addition to attracting foreign investment in local SMEs, such support would allow for knowledge transfer from foreign companies to local SMEs.
While the UAE is working on improving market access through different initiatives, the Dubai Startup Hub remains one of the most notable programs that is supporting SMEs and startups. The program has so far received more than 500 applications, however not all SMEs can have successful acceptance into the hub. Only the 21 successful applicants (4 percent) will benefit from training and workshops within the hub. This low rate of acceptance reflects the need to provide training to the many startups and SMEs in order to enhance market access. This can be done through additional training and to facilitate the application process for SMEs and startups. In addition, such hubs can be done in different emirates and not only in Dubai. These measures are necessary especially amid a global pandemic.
In addition to the aforementioned Dubai Startup Hub, the Abu Dhabi’s Hub71 aims at covering all employees’ housing and office space rent for two months, and will evaluate the need for further support on a monthly basis as it shores up the 51 start-ups housed there amid Covid-19. To facilitate the use of its services during the pandemic, Hub71 moved all of its programming online at the very beginning of the pandemic in March. So far the hub expanded to 51 start-ups with the announcement of 15 new joiners to the Hub71 Incentive Program. Its Selection Committee prioritised global start-ups in the field of HealthTech and EdTech, which have supported adaptations to the complex challenges of the Covid-19 pandemic. In this regard, the Dubai hub can apply similar measures to focus on startups in similar competitive and innovative fields.
In addition to the need for training, some studies show that 91% of UAE SMEs face international shipping provocations. On the other hand, 73 percent of the SMEs in the UAE said that in order to grow their business, they need to export more, while 67 percent already prioritise export markets over home markets. This dilemma can be tackled with technology to help SMEs cut down on costs and focus more on shipping and trade. In this regard, international experience shows that digitisation has improved the business of SMEs around the world. In the UAE, only 15 percent of SMEs use online rate quotations and booking tools, which is the second lowest percentage after the UK. Further, technology to help SMEs is crucial in times of a global pandemic restricting physical access to the international market.
Tech support is not only limited to market access, SMEs can also have difficulties accessing a wider range of bank services, including account opening, impacting their ability to pay for services and invoice clients. While there are a number of initiatives led by the CBUAE and the launching of NEOBiz, there is still an area for an improvement in tech support. Underinvestment by UAE banks in this area demonstrates the need to digitize banking services and normalize it. This will depend on the services similar to NEOBiz, but also to support specialist SMEs and large banks to create such services with different operating models and higher efficiency especially with data and risk analysis.
Credits to SMEs in UAE stand at about 5% of total bank lending, in line with other countries in the region but below levels in many developed markets. Adding to the above challenges in terms of credit schemes, it is crucial to offer credit guarantees to vulnerable sectors and SMEs to tackle banks’ reluctance to lend amid the ongoing uncertainty. This will reduce banks’ reluctance to increase exposure despite the ongoing uncertainty. Existing credit guarantee schemes should be enhanced in terms of scale and coverage. In addition, such programs should receive adequate funding, have a strong governance structure and follow the best credit risk management practices.
To do this, a technical committee should be formed in one of the relevant ministries to develop an implementation plan that will ease credit guarantees. Additionally, an SME Fund Guarantee Program can be created. Such programs have been implemented in neighboring countries like Saudi Arabia where it proved to be successful.