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Shunned by banks, and abandoned by staff, are SMEs folding?

SMEs face seemingly insurmountable obstacles. From lack of funding to regulatory bureaucracy and eventually getting staff on board and holding on to them at low wages is not what any entrepreneur hopes to encounter.

The journey is fragile and harsh but it looks like SMEs are a tough cookie to crack.

The Small and Medium Enterprises (SME) sector in the GCC presents a potential of $920 billion with 156 per cent growth in the next five years, employing 22 million people, according to a new study by MENA Research Partners (MRP), a research company in the region.

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Anthony Hobeika, Chief Executive Officer at MENA Research Partners (MRP), said: “Most of this growth is expected to come from key geographies such as Saudi Arabia and the UAE, which are giving high priority to SMEs across many new regulations, policies and initiatives with the aim of boosting their share in the national economy.”

A parallel annual survey conducted by found that the vast majority of respondents in 2017 again reported the desire to be entrepreneurs.

 The desire to become entrepreneur

 84 per cent of those surveyed were currently employed in the public or private sector. Interestingly, the preference for self-employment was considerably lower in Pakistan (39%), Algeria and the U.A.E. (both at 55 per cent).

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Overall, 29 per cent of respondents preferred to work at a company, versus being self employed.

Respondents selected “personal fulfillment” (53 per cent) and “freedom to choose work-life balance” (41 per cent) as the top reasons for preferring to be self-employed. For those who prefer to work at a company, earning regular income and learning new skills emerged as the top reasons.

However, the study found that there are several barriers and gaps preventing them from doing so.

What are these barriers?

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Lack of financing

Only two per cent of the total bank lending across the Gulf Cooperation Council (GCC) goes to small and medium enterprises (SMEs), the lifeline of the region’s economies.

According to a 2016 World Bank study, access to finance is one of the main obstacles to the growth of SMEs in GCC economies.

It said that only an estimated 11 percent of SMEs in the GCC have access to credit, and about 40 percent of them identify lack of financial access as a major constraint.

“Although bank lending is the main source of financing for GCC firms of all sizes, SME lending penetration is very low, with an average of 2 percent of total loans, compared with 13 percent in non-GCC Middle East and North Africa (MENA),” it said.

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The study said that Banks perceive SMEs as having a higher credit risk, and therefore demand higher risk premiums or collateral requirements.

“SME loans in the UAE represent only 4 percent of all lending; in the KSA, Kuwait and Oman, they account for 2 percent of all lending; in Bahrain, 1 percent; and in Qatar, 0.5 percent,” it said.

Financing alternatives outside the banking sector are limited.

The governor of the Central Bank of the UAE was quoted in the media on November 22, 2017 saying he wants private equity firms to help fill the void left by banks that have cut lending to SMEs in recent years.

Not so business-friendly

Regulatory burdens are also hindering the growth of the small firms. The region’s countries have poor rankings in the ease-of-doing-business indexes.

 According to Abu Hweij, impending reforms in regulation and legislation, and a “lack of emphasis on modernising the education sector to produce the talent needed to create knowledge workers” are the other challenges faced by the SMEs.

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 “A lack of research, data and reports also hampers effective decision-making,” he adds.

According to Zdnet, a platform for technology news,  high fees for business registration and licensing, ownership structures, and unclear legal frameworks are all major hurdles facing SMEs in the region, it said.

High staff turnover

A recent report for the EU-GCC Chamber Forum project reveals that access to talented manpower for Gulf SMEs is limited.

“This has to do with the better salaries that larger companies can often afford to provide, but also with the lack of career plans and long-term prospects for SME employees. Very few companies have a clearly structured human resources policy. Loyalty of workers hence is often limited. Turnover of national employees unrelated to the owners tends to be particularly high and a source of frustration for management,” it said.