Why bank lending to SMEs is very low in the UAE?

A survey of more than 700 small and medium enterprises (SMEs) conducted in the UAE has shown that 83% of them have no access to bank loans. Similarly, a panel discussion held at the SME World 2014, a two-day summit organized in Dubai on March 26 and 27, 2014 revealed that bank loans to the SMEs across the UAE adds up to just 4% of the total lending as compared to double digit figures in the developed world. This may sound shocking when one realizes that 90% of the companies registered in Dubai are SMEs.

Some other complaints that SME owners have against local banks include high interest rates being charged on loans, various problems encountered while opening of bank accounts, banks unilaterally closing down some of the accounts despite the concerned enterprises maintaining sufficient balance with the bank, among others.

Top bankers cite reasons like regularity-compliance and transparency-related issues for the reluctance of local banks to extend loans to SMEs. Therefore, MoneyGulf.com conducted a study to precisely know more about these issues and found that SMEs in the UAE find it tough to access bank loans because of the following reasons:

1. The SME sector in the UAE lacks professionalism and financial transparency because of which many promoters tend to mix up their personal and business expenses. Senior bankers maintain they cannot extend credits or loans to such SMEs unless they initiate robust financial planning and start maintaining transparent financial records.

2. Banks view some of the SMEs as risky loan clients because of their erratic management and unsound financials. Bankers believe lending money to SMEs that lack financial discipline and formal management structures may not only prove very costly at a later state, but it is also fraught with risk in the light of their high-risk operations.

3. The limited size of most SMEs in the UAE coupled with lack of appropriate credit history is another deterrent for banks considering financial support to most small and medium-sized firms. Many of these SMEs fail to draw up a clear business strategy and some of them even lack a robust business model to inspire confidence of bankers.

4. Many SME owners do not bother to maintain proper books of accounts or prepare accurate financial statements. Those who meticulously maintain them, fail to get them audited because of which such entrepreneurs and their finance managers lack comprehensive understanding of their own financing requirements and banking needs.

5. While some of the SME owners may understand their business very well, they fail to implement good corporate governance measures and the essential standards within their business operations. Furthermore, most SMEs are unable to offer tangible or real assets as security that financial lenders can fall back on in the event of loan defaults.

6. SMEs also find it difficult to secure bank funding because some of them tend to have a great exposure to local market conditions as compared to bigger multinational companies. So when the domestic economy goes through a downturn, such SMEs are adversely affected and they are unable to meet their debt repayment schedules.

7. Currently, there is no functional credit bureau in the UAE because of which banks find it extremely difficult to obtain comprehensive information or sufficient market data about the past credit history of their SME clients. Once the Al Etihad Credit Bureau (AECB) becomes operational, this particular lacuna may get eliminated permanently.