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.

Why inclusion of personal finance management in UAE’s public school curriculum is a step in the right direction?

The UAE Ministry of Education has recently taken a decision to embed financial literacy into the national curriculum and introduce Personal Finance Management (PFM) as a mandatory subject in the country’s revised public school syllabus from the coming academic year in a bid to battle disturbing debt trends among youth.

To accomplish this goal, the Ministry of Education has collaborated with Emirates Foundation for Youth Development (EFYD) and has signed an agreement on April 16 with regard to the new syllabus and relevant modules under the Educational Curriculum Initiative. EFYD is an independent philanthropic organization established by the Abu Dhabi government for development of youth.

This move on the part of the country’s Ministry of Education is aimed at creating greater awareness among young people about how to manage their personal finance. It is also expected to bring in other benefits by contributing in a big way to a bright and prosperous future of the UAE by increasing the financial literacy skills of the country’s youngsters and by improving their job and career prospects.

Emphasizing on the need for the country’s youth to well-comprehend the issue of personal finance management and imbibe the concept of savings, Minister of Education Hameed Mohammad Al Qattami said increasing financial literacy skills is thus the key to UAE’s human development. Emirates Foundation Chief Programmes Officer Maytha Al Habsi believes financial literacy training is the need of the hour in the UAE as 70% of the Emiratis under the age of 30 are reported to be in debt.

Stating that inclusion of personal finance management in the teaching curricula will allow students to gain the necessary skills and knowledge as well as the required values and attitudes to carve out a sustainable future, Emirates Foundation Managing Director Sheikh Sultan bin Tahnoon Al Nahyan said this move will thus ensure a prosperous future for the coming generations.

Since financial issues have been identified as a key contributor to divorce, the UAE continues to face serious issues related to debt among young people that tend to create a negative social impact. In this scenario, the decision to introduce personal finance management as a subject at the school level will definitely help young people in the UAE to enhance their financial planning and management skills. It will also teach them how to avoid excessive debt, while managing their finances in such a manner that they can provide for themselves and their dear ones throughout their lifetime.

Financial literacy surveys conducted in various countries, including the United States, have time and again confirmed that the need for financial education is indeed great. Without a solid foundation on which to base their everyday financial decision, most people find themselves on slippery grounds when it comes to dealing with bad situations that crop up unexpectedly and when they are required to take tough financial decisions to overcome them.

On the whole, these surveys have concluded that financial literacy education helps transform students into better money managers so that they become financially smarter when they grow up. Such courses imparted at a young age not only have a lasting impact, but also contribute towards changing their financial behavior permanently from a very young age.

Furthermore, it also makes them spend their money more smartly and put aside more savings and also enable them to deal with their complicated financial life more wisely. All these give them the required confidence and peace of mind to live happier and better lives than their contemporaries who could not attend such financial literacy courses during their school years.

Key facts you should know about World Expo 2020

Dubai will be hosting the World Expo 2020, which is regarded as the third largest global event after the Olympics and the World Cup Soccer, from October 20, 2020 until April 10, 2021. As a general rule, this six-month event is held every five years. While the last World Expo was held in Shanghai, China in 2010, the next one is scheduled for 2015 and will be held in Milano (Milan) in Italy.

While the Shanghai Expo focused on sustainable city development under the theme ‘Better City, Better Life’, the one in Milano will be titled ‘Feeding the Planet, Energy for Life’. Similarly, the theme of the Dubai Expo scheduled for 2020 would be ‘Connecting Minds, Creating the Future’. With this theme, the Expo will foster a hands-on approach to figure out the solutions to three very concrete sub-themes: mobility, sustainability and opportunity.

In the history of World Expo, so far this mega event has never been organized in the Middle East, Africa and South East Asia. As such, Expo 2020 in Dubai will be the first-of-its-kind international exposition in this region and it is expected to attract 25 million visitors from over 200 countries around the world and thereby help Dubai and the UAE reinforce their position as a global business hub.

Expo 2020, which marks the celebration of the 50th anniversary of the Emirate, will be organized on a 438-hectare site located adjacent to the new Al Maktoum International Airport on the southwestern edge of Dubai which is equidistant from Dubai and Abu Dhabi. The site will be divided into three areas dedicated to each sub-theme and these thematic zones would lead to Al Wasl, the main plaza. Different countries would be allowed to set up their pavilions in the area that best corresponds to their development strategy.

After the Expo gets over, the site based on modular design will be dismantled and rebuilt to create appropriate infrastructures – such as the Dubai Trade Center Jebel Ali, an Expo museum, a university and apartment buildings – in a bid to further develop the entire region.

Now coming to the most important question with regard to how Expo 2020 is going to affect the lives of Dubai residents, this high-profile exposition will have a very positive impact on all sectors of Dubai’s economy, which in turn will immensely benefit the local residents. First and foremost, it will bring in unprecedented investments into various sectors of the local economy, thereby generating a large number of business and employment opportunities.

Business opportunities will get created as Dubai transforms into a top global centre for tourism, trade and finance, giving a major boost to hotels, restaurants, car rental agencies and other related economic activities. Job opportunities will surge as large construction projects get underway, as well as tourism and hospitality sectors witness an exceptional boom. For instance, a study done by consultancy Oxford Economics estimates that the World Expo 2020 will lead to creation of about 277,000 new jobs as well as significant rise in salary levels in some industrial sectors.

Finally, coming to the negative effect this global exhibition is likely to have, majority of the people residing in the emirate fear the unprecedented influx of tourists, investors and job aspirants may create an upward pressure on the prices of essential goods and commodities across the board, which in turn will lead to a rise in cost of living. Secondly, if there is a major surge in the number of people coming to work in the UAE, property rentals will shoot up considerably, which may further compound the inflationary trends.

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.

How are sukuk different from conventional bonds?

(1) Sukuk (plural of Arabic word sakk meaning certificate) are Islamic bonds, which are asset-based securities. Those who purchase sukuk are rewarded with a share of the profits derived from the asset. They don’t earn interest payments because of the Islamic ban on interest. However, conventional bonds are debt instruments and the investor receives an interest payment or coupon, against their investment.

(2) Sukuk gives the investor or holder an undivided beneficial ownership in the underlying assets on which the Islamic bond is based. This ownership right is directly proportional to the total amount he has invested or the number of sukuk he holds. Conventional bond just represents a contractual debt obligation from the issuer to the bond holder. So conventional bond does not bestow on the investor any ownership rights in the asset, project, business, or joint venture the bond supports.

(3) The assets on which sukuk are based must be sharia-compliant. Sukuk holders are entitled to a share in the revenues generated by the sukuk assets. There are no such class restrictions with regard to the nature of assets when it comes to conventional bonds. The money mobilized through conventional bonds can be used to finance any asset, project, business, or joint venture that complies with the local legislation.

(4) Most individuals invest or buy sukuk because of their religious dispositions. People, who buy or invest in conventional bonds do so solely guided by monetary or profitability considerations.

(5) The face value and issue price of a sukuk is based on the market value of the underlying asset. The issue price and face value of a conventional bond is based on the issuer’s credit worthiness, including the assigned market rating.

(6) Sukuk holders receive a share of profits from the underlying asset and in case of loss, they also have to accept a share of the loss incurred. So, the initial investment isn't guaranteed and the sukuk holder may not get back the entire principal amount. Conventional bond holders receive regularly scheduled and often fixed rate interest payments during the life of the bond till they mature and are redeemed, and their principal is guaranteed to be returned on the bond’s maturity date.

(7) In the case of sukuk, there is a possibility of capital appreciation. So, investors may sometimes get more return on their invested capital or more than the principal amount. As against this, in case of conventional bonds the return is fixed and cannot vary with the performance of bond issuer.

(8) Sukuk holders are affected by costs related to the underlying asset. Higher costs may translate to lower investor profits and vice versa. Bond holders generally aren't affected by costs related to the asset, project, business, or joint venture they support. Hence, the performance of the underlying asset doesn't affect investor returns.

(9) Sukuk are of recent origin and they emerged to fill a gap in the global capital market because of Islamic investors wanting to balance their equity portfolios with bond-like products. Conventional bonds have been in existence for centuries and have been in use as financial instruments across the world irrespective of the regional affiliation or religious disposition of the issuer or subscriber.

(10) Of late, the sukuk market is growing rapidly on the back of significant growth being witnessed by Islamic finance across the world coupled with the fast growth in Muslim population. Conventional bonds are not witnessing that kind of growth or popularity or demand.

Why you should not delay Buying a Residential Unit in Dubai?

Many of the expatriates who have been living in the UAE for the last so many years are likely to have invested in residential properties back in their home countries, while they continue to live in rented apartments or villas in the emirates. While it is always a good decision to invest in realty projects back home, it also makes good economic sense to own at least one residential unit in the country where one is currently employed and is likely to continue residing for at least a few more years.

As such, in case you are an expatriate residing in Dubai with plans to continue here for some more years and still don’t own a house in the UAE, it is high time you reshuffled your priorities, turned your attention to your current location and decided to buy a residential unit in Dubai without further delay because of the following reasons:

1. Though realty prices have been going up since mid-2012, even now there are decent deals available in the market. Therefore it’s as good as any in terms of time for you to buy right now as there are still ample opportunities for good bargains. So don’t believe if someone says it is too late to buy a house now because with Dubai winning the 2020 World Expo bid, realty prices will keep surging over the next few years.

2. Of course, if you had purchased a house between 2010 and 2012 or even last year, you could have got it at a much lower and attractive price. Though housing prices are now on the upswing, there are still many residential projects that are available at very tempting valuations. So it is definitely advisable to buy a house now before the property prices move up any further and gradually become unaffordable.

3. In your individual case, if affordability is an issue and you don’t have ready savings or liquid funds to buy a house outright, then take a mortgage loan and buy the property of your choice. Since most of the banks in the UAE are flush with funds and they are also scouting for more business and more customers, even now home loans are easily available at relatively appealing mortgage rates and terms.

4. Prices of residential units may jump as much as 40% this year, according to Dubai’s Land Department. Furthermore, the UAE economy has recorded a remarkable and rapid improvement since 2012 and is expected to expand by 4.7% this year after recording a growth of 4.9% in 2013, which has been the fastest growth since 2007. So buying a house is the best way to capitalize on the resurgent interest in the Dubai real estate market.

5. Of late, all the sectors of the UAE economy are on a recovery mode. As a result, not only are the real estate prices on the upswing, but rents of apartments and villas are also on their upward trajectory. Because of the soaring rent, it makes more economic sense to buy a house instead of taking one on rent. By doing so, you can use the amount you now pay as rent for repaying the mortgage loan availed to buy your dream house.

6. Even now, real estate in Dubai is relatively cheaper when compared to equivalent global hubs. Furthermore, Dubai enjoys advantages such as (i) proximity to the African markets, (ii) it is a gateway and an oasis of peace in an inherently unstable region, (iii) has a solid and diversified economy that keeps growing at a decent pace, which will invariably keep on attracting more and more investors and expatriates in the coming years.

In view of the above factors, property prices and rents in Dubai will keep rising consistently over the next few years. Therefore, as an expatriate residing in Dubai, you should not delay buying a residential unit anymore because if you wait any longer, it will only become more and more expensive and unaffordable.

How the current Dubai realty boom differs from that of 2003-08

Dubai witnessed a major boom in its real estate sector between 2003 and 2008. After 4-5 years of unprecedented price increases, the realty market saw a devastating crash during the global financial meltdown that started in October 2008. However, since 2013 a new boom has begun in the emirate’s property market and many people seem to wonder if this new boom is sustainable or whether it is a new property bubble waiting to burst.

As such, we at MoneyGulf did a thorough research of the fundamental trends behind these two realty booms. After a detailed study, we have come to the following conclusions.

1. Unlike in 2003-08, the new boom is being triggered by strong demand from families who plan to live in Dubai long term because of the emirate’s political stability and safe haven status in the Middle East. So this time, the price increase in the realty market is fueled more by the end users rather than flippers.

2. In a bid to help sustain and regulate Dubai’s property market, government authorities have introduced a series of regulatory measures over the past few months. As a result, initially there was a cooling in the rate of growth, which in turn has positioned the market towards a more sustainable pace of growth.

3. Speculation was rife in Dubai’s realty market during the 2003-08 boom. However, this time speculators won’t have a free play as authorities have taken concrete steps to curb speculation in the property market. For instance, the emirate has doubled the fee it charges on real-estate sales from 2% to 4%.

4. Currently, all sectors of the UAE economy are in a recovery mode. So, property prices are seeing a more broad-based recovery. Since everything is picking up, they are also impacting the volume of deals recorded in Dubai’s realty market thereby driving sustainable growth and strong demand over the long term.

5. During the earlier boom, the economy of Dubai was increasingly driven by the construction sector, representing nearly 14% of GDP. As the sector saw a major slump after 2008 and started reviving only in 2013, currently the construction industry is relatively subdued with its contribution to GDP standing below 8%.

6. Due to the lower share that construction sector currently represents in the overall GDP, presently the realty sector is not at all overheated. Hence, there is no need to fear a property bubble as Dubai is now witnessing a sound and balanced economic upswing with realty growth not being reminiscent of 2008.

7. A report by Citi says the real estate and construction sectors are much less highly geared now than they were in 2008. This reduces the sector’s vulnerability to exogenous shocks, thereby bringing down the likelihood of a sudden stop in construction activity and its negative impact on the wider economy.

8. To secure banks and financial institutions from bad debts and over exposure, the UAE government has recently set up the Al Etihad Credit Bureau. Once the bureau is fully operational, it will help banks take an informed decision whether to offer credit to potential customers by providing their complete credit history.

9. The Al Etihad Credit Bureau is likely to go live this year. If that happens, there may be a lull in bank lending for some time as loans will be given only to those with good credit history. This means once the Credit Bureau goes live, those having bad credit file and history cannot hope to get a house on mortgage.

10. Though it may be too early to assess whether the regulations unveiled by the government will succeed in curtailing future growth at levels perceived to be more sustainable over the long term, the volume of deals that are being recorded in Dubai’s residential market is still within reasonable limits.

Taking into account the above facts, we can say that unlike the earlier boom, the current real estate boom in Dubai is being monitored closely by the government authorities with the specific aim of averting the scope of a property bubble as had happened in 2008.