Why small business?
Small and Medium businesses are the backbone of any economy, and this is true in the UAE as well. I was looking through the UAE Central Bank reports, and I found that out of the AED 1592.6 Billion extended in domestic credit, SMEs just got a paltry AED 89.5 Billion (2019 figures). 1 USD = AED 3.67
As per an National Bank of Fujeirah report released in 2019:
"400,000 SMEs contribute over 60% of the non-oil economy and provide 86% of the private workforce. They make up 73 percent of the UAE's wholesale and retail trade sector, 16% of the services sector, and 11% of the industrial sector."
Problems
We know from speaking to business owners that many find setting up a company bank account a struggle. Securing finance is the second biggest concern. Loans tend to be given out for short-term requirements and working capital finance, with only a few stretching beyond 24 months. What is needed is long term financing.
Some banks require a three-year trading history before considering a small business loan! Approval rates are in the 40-50% range and require a ton of paperwork.
This is the very definition of an under-served market. There are risks and rewards for extending credit to SMEs. Opportunity for Fintech SMEs to enable credit decisions, real-time audit tools, cash flow management, trade financing, among others?
Solutions
Adding a few lines after I got inputs on the above article (mostly from my banker friends):
1) There have been defaults in the past where SME owners do a runner out of the country. Can we create bridge financing options for them, so that they don't have to resort to this?
2) Can equity financing opportunities be created at a suitable small cap stock exchange? This can bring down the cost of financing and perhaps bring in a more patient set of investors.
3) Some SMEs do not maintain audited financials by reputed auditors. This can help banks assess the repayment ability of the SMEs better. Also, post financing, these audits can create early warning signals for both the lenders and the management teams of the SMEs. Can #fintechs make it easier to keep records and connect them to reputed auditors?
Any other solutions? I can think of @beehivefintech as a non-banking SME financing "Fintech"; are there others out there?
A lot more needs to be done now that many of these small businesses are under extreme stress due to the Pandemic. Time for the Local Banks to act strongly!
