TASNEEM LAKDAWALLA emphasizes on the importance of trust and transparency between SMEs and banks and why these two qualities are vital to building a healthy entrepreneurial community in the region.
According to Dubai’s Department of Economic Development, SMEs represent 95 percent of all firms registered in the emirate of Dubai, 42 percent of the labor force and 40 percent of the emirate’s GDP. As Sami Al Qazi, the DED’s Director-General, says, SMEs play “a critical role in achieving and fostering overall development across diverse economic sectors.” As we all know, Dubai is not a true microcosm of the broader MENA region – but it does see itself as a harbinger of the future. So it may seem strange that a key finding from KPMG’s UAE banking perspectives, launched last month, should be that:
“Trust and transparency are keys. Despite economic headwinds, these fundamentals, combined with continuing government support, better risk profiling by banks and more robust approaches to core business planning and cash generation, will continue to drive broader economic participation and success through 2017.”
How can SME owners and their lenders learn to trust each other again? One answer to that comes from the central premise of our recent thought leadership: having got many of the basics right, banks are now focusing on getting the balance right – and trust is a fundamental part of that balance. But trust, as SME owners will know, can be a double-edged sword.
There are certain things that position the UAE as the unrivalled SME growth center for MENA. You can say this is the right place for the right people with the right ideas. But it is certainly true that there are a number of continuing challenges. One of those is the ongoing working capital challenge. Most of the UAE’s SMEs are small, rather than medium sized. This makes them agile and responsive to market demand, but it can also mean that they are more susceptible to working capital issues. It means that their balance sheets are more likely to be significantly impacted by delayed settling of invoices. And it means that SME owners are much more likely to have to depend on non-traditional credit sources to bridge credit difficulties. If banks are unwilling to lend to SMEs and their owners, and government largesse has been somewhat restricted by a lower oil price, what can be done to support this vital sector of the economy? What can be done to bridge a critical divide?
Let’s look at the bare bones of the relationship between SME owners and their banks. A key principle of responsible banking was, is and will continue to be, know your customer. In an anti-money laundering context, KYC has all kinds of complicated connotations. But from the point of view of wanting to develop meaningful relationships between a lender and a loanee, KYC means understanding your customer’s profile, industry and business. It means, wherever possible and necessary, setting up face-to-face meetings. And – at its most basic – it means lending based on a clearly understood ability to recover the loan.
SME owners can be indignant when asked whether they are a ‘good risk’. Even with the new bankruptcy law, which should encourage SME owners who might otherwise be tempted to ‘skip’ to try to restructure their debts and save their businesses, SME owners can be tempted to see themselves as more sinned against than sinning. But maybe it is time owners looked at the relationship between the banks and their creditors through a banker’s pince-nez. SMEs – for the reasons we have already seen – are more likely to fail than larger businesses. Entrepreneurs, by their very risk-accepting nature, are more likely to be unsuccessful than they are to succeed. Yes – of course there are many examples of small and medium businesses that have soared into the top echelons of business. But most SMEs are only relative successes – small businesses tend to remain small.
The issues arguably don’t only lie with SME owners. There are UAE banks that have struggled with the entire SME customer journey. From onboarding through monitoring to the end of a banking relationship, banks need to understand not only what SME owners are looking for but also the risks they face – and therefore expose the lender to. While banks must interact with their customers more regularly, SME owners may want to be more honest about their current and future circumstances. There may also be a role for governments, who need to facilitate growth and investments, creating the necessary environment to allow SMEs to grow.
While banks must interact with their customers more regularly, SME owners may want to be more honest about their current and future circumstances.
Most industry observers can identify common challenges for SME owners: significant setting up costs, the hunt for decent talent and a growing reluctance for banks to lend. However, there are reasons to be optimistic. Although VAT is likely to be introduced in the first quarter of 2018, the initial rate is low enough that it is unlikely to deter the entrepreneurs which are such a vital part of the economic picture. Non-performing loans have increased slightly, but not by as much as was initially expected – perhaps possibly in part due to the efforts of the UAE Banking Federation and others to work together with SME owners facing up to the consequences of poor decisions. The oil price, while unlikely to breach the US$100/barrel mark for some time to come, has stabilized – and stabilized at a level where there is significant profit for many MENA producers. The UAE, having invested significantly in its infrastructure over the last 40 years, now boasts unrivalled road, sea, air and telecommunications networks – proven value additions that will, in and of themselves, generate opportunities for wealth and job creation. Expo2020 is on the horizon and the considerable amounts of public and private investment that have been announced are likely to have a positive effect on both the financial services sector and the private sector. The hospitality sector, a key contributor to the UAE’s ongoing efforts to diversify the national economy away from oil, offers a wealth of untapped opportunities. And that optimism is beginning to be reflected across the economy – according to the Emirates NBD/IHS Markit Purchasing Managers Index (PMI) published on 4 April, the non-oil PMI climbed to a 19-month high of 56.2 in March, up (even if only marginally) from 56.0 in February.
What makes the difference? Honesty, trust and transparency – and these are the traits we will need to see from both SME owners and their bankers as we move towards the next stage of the UAE’s economic development.