What are the alternative sources of funding for SMEs that find it tough to get bank loans in UAE?

In our last article, we explained why bank lending to small and medium enterprises (SMEs) is very low in the UAE. In this article we shall discuss the alternative sources of funding available to entrepreneurs desiring to start, finance and grow their SMEs in the country.

Obviously, the government is the main player in this sector and some of its initiatives, programs and policies represent the best and safest sources of funding for SMEs. One such government body that immediately comes to mind is the Khalifa Fund for Enterprise Development (KFED). Besides offering financial services, it also provides advisory and counseling services to the concerned SMEs.

The Khalifa Fund was originally launched in 2007 to help develop local enterprises in Abu Dhabi, with a total capital investment of AED 2 billion. Over the years, it has set up branches in other emirates. For instance, the Fund opened a branch in Ras Al Khaimah in July 2011. Currently, it also has branches in Al Ain, Ajman and Fujairah. Financing solutions are offered for all viable projects via four different programs – Khutwa, Bedaya, Zeyada and Tasnea, which cover all project segments.

Khutwa is a microfinance program that offers flexible loans up to AED 250,000 to support small enterprises (micro-businesses). The program is social in nature, allowing the creation and growth of income streams for specific target groups, specifically divorced women, widows and retirees.

Similarly, the Bedaya program is designed to support new SMEs with flexible loans of up to AED 3 million. And Zeyada is a program that provides existing, early-stage SMEs with flexible loans of up to AED 5 million for expansion and development purposes.

Lately, Khalifa Fund has been giving more emphasis on industrial projects that require larger investments. Accordingly, it is now offering entrepreneurs a new financing program called Tasnea to stimulate the industrial and economic diversification in the UAE. Since its inception, the Khalifa Fund has financed 670 pioneering UAE entrepreneurs with funds amounting to AED 941 million. It is now committed to financing at least AED 200 million a year.

Another important SME financing agency in the UAE is the Mohammed Bin Rashid Establishment for SME Development (MBRE) run by the Dubai Department of Economic Development. Under MBRE, a special Fund has been set up specifically to support SMEs. The objective of this Fund is to support and finance projects of young entrepreneurs and a hundred projects are being financed every year. The Fund has been mandated to give loans, provide financial guarantees and contribute to the projects.

To aid, support and fund SMEs, the other emirates also have their own government funding agencies such as the Ruwad Establishment in Sharjah and Al Tomooh Finance Scheme in Ras Al Khaimah. While Ruwad was set up as a division of Sharjah Chamber of Commerce and Industry and it extends funding and technical support to SMEs run by nationals, Al Tomooh Finance Scheme is considered the first program of its kind in the UAE and was established as an Emirates NBD initiative with the aim of financing projects set up by UAE nationals.

Furthermore, in November 2013 HSBC has launched its latest International Growth Fund committing AED 1 billion to the internationally-oriented SMEs in the country. The Fund is open to new and existing SMEs with cross border trading requirements or to those that aspire to grow internationally, and have an annual turnover of AED 30 million and above.

However, most of the aforementioned funding supports are aimed more at UAE nationals and less at expatriates. So, when it comes to expats who want to set up their own ventures in the UAE, the funding options available are venture capital funding, private equity and crowdfunding. Though UAE lags behind in deploying these means of finance, they are gradually becoming more and more popular.

Emphasizing that private equity and angel investing can be very good options for SME financing, Dubai SME’s Director of Strategy and Policy, Alexandar Williams, said his company is in the process of mapping the universe of angel investors in the UAE to help connect these investors with viable startups that show long-term growth potential. Dubai SME aims to promote equity financing and angel investing as a complementary and alternative mode of funding for startups and SMEs in various stages of growth in the country, Williams added.

According to Dr Nasser H Saidi, Managing Director of Nasser Saidi & Associates and former Chief Economist at Dubai International Financial Centre (DIFC), over and above venture capital and private equity, new concepts such as crowdfunding or crowd investing can also help meet the demand of the SME sector for funds.

Crowdfunding uses social media on the internet to raise money in small chunks from a large number of investors in exchange for equity. Interested investors tend to buy small stakes in a new venture or SME, which in turn enables the concerned entrepreneur to meet his funding needs.