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.

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.

12 reasons why Islamic Banking and Finance are Booming Globally

1. The global Muslim population has been growing very fast and has long been underserved in terms of Shariah finance. As such, more and more Islamic banks and financial institutions are setting up shops in Muslim countries under the GCC and MENA region as well as in countries like Malaysia, Oman, Qatar, the UAE, Pakistan, Saudi Arabia and Brunei Darussalam.

2. After the global financial meltdown, more and more people are seeking alternative forms of financing that is more ethical, discourage speculation and are less crisis-prone. Shariah finance meets this demand. So Islamic finance is gaining ground even in non-Muslim countries and the United Kingdom and Germany have started issuing Islamic bonds.

3. Malaysia, which is currently the world's largest marketplace for sukuk, is shifting its focus from local market development towards attracting global issuers. The country is also investing heavily in a bid to develop its human resources to give a fresh impetus to the phenomenal growth of the Islamic financing industry in the coming years.

4. Saudi Arabia is today the world’s largest Islamic banking market, with total assets estimated at US$217 billion. Its current market dynamics are so favorable for Islamic banking that it has become part of the normal retail and corporate banking and its share of the total banking market has doubled in recent years to more than 50%.

5. In a bid to emerge as the global capital of the Islamic economy, Dubai has drawn up regulations to attract sukuk issuance and trading as well as expand the Islamic insurance sector. As the primary trading hub of the MENA region, Dubai’s geographical position makes it the ideal location to serve at the convergence of Islamic finance.

6. As Britain is the European base for Middle East banks and also a major centre for the region’s investors, London is striving to become the capital of Islamic finance in the Western world. Hence, it has put in place sukuk legislation and the LSE has raised more than US$49 billion. Besides, 20 UK banks today offer partial or full Islamic banking products.

7. In some of the Islamic countries, many people do not invest in bank deposits as they believe that whatever they earn on their savings is in fact interest and thus against Shariah. So governments in these countries have started promoting Islamic banking and finance to cater to the banking needs of this segment of the unbanked population.

8. In countries like Pakistan, the federal government and the State Bank of Pakistan (SBP) have drawn up a five-year strategic plan aimed at promoting the Islamic banking and finance sector. As part of this, fresh licenses would not be issued to conventional banks, while a good number of applications for Islamic banks would soon be approved.

9. In a bid to diversify and widen its banking services, Oman announced its decision to license Islamic banking services in 2011. A Royal Decree amending the banking law was then issued and two new local banks were granted approval to operate as Islamic banks. A number of conventional banks have also established windows for Islamic banking.

10. Innovation is also one of the factors driving growth of Islamic finance. A few years back, Islamic bond market was small and sukuks were of five years or less. Lately bonds with longer-term offers, perpetual bonds and hybrid capital issues that allow a mix of debt and equity launched by Islamic banks have started attracting more and more investors.

11. The latest Global Islamic Finance Report (GIFR) says by 2020 the Islamic banking and finance (IBF) sector in at least six nations across the globe will have attained a market share of more than 50% of the total financial sector in these countries. They include Brunei Darussalam, Saudi Arabia, Kuwait, Qatar, Malaysia and the UAE.

12. Because of growing demand for sukuks and takaful, Islamic finance is rapidly becoming an important revenue generator for banks and financial institutions. They also offer more choices to companies and investors and allow issuers to offer products tailored to specific needs. This is also supporting rapid growth of the Islamic finance market globally.

What happens if you don’t Repay Loan or Credit Card dues in UAE?

When you avail a Personal Loan or apply for a Credit Card in the UAE, the concerned bank will make you sign a blank cheque towards security deposit. In many countries around the world, issuance of dud cheques as well as defaulting on a bank loan or Credit Card dues are categorized under civil and commercial offences. Hence, criminal courts are not involved in the matter.

However, the legislative approach to the issue of bounced cheques in the UAE is very different than most other advanced countries. Article 401 of the UAE Penal Code says that an individual who issues a cheque with insufficient balance – causing the same to bounce – can face imprisonment of one month to three years, or a fine of a minimum of AED 1,000.

As such, in accordance with the UAE Penal Code, issuance of a bounced cheque is deemed a punishable criminal act. So, one would be signing his own prison sentence if he knowingly or unknowingly issues a signed cheque, which he cannot honor. Furthermore, he would be nurturing a mistaken notion if he believes that he would be out of prison after serving the jail term for this lapse on his part because until his debt is cleared he may continue to languish in jail.

Though a bounced cheque normally entails a minimum of one month to a maximum of three years in jail as per the UAE laws, the actual reality is far from it because a debtor won’t be set free from his financial liabilities even after he has done his jail term. There are many cases where expatriates who were jailed for issuing dud cheques are still languishing in the local jails even after completing the prescribed prison term, solely because their debts have not been cleared yet.

Here one should remember that a bank collects a signed cheque as security deposit at the time of issuing a Credit Card or a loan purely in a bid to put pressure on the loanee in case he defaults on repayment of loan or Credit Card dues. So, if a customer fails to repay his loan or Credit Card dues in the UAE, the entire process goes roughly as delineated below.

Let us assume that a borrower has defaulted on a loan or Credit Card payment. Then the bank recovery squad will start hounding him and keep on following up with him insisting that he repay the loan immediately. If there is no prompt and positive response from the defaulter, then the recovery team will present the security deposit cheque in the bank for clearance.

If there is insufficient balance in the borrowers account, the cheque will definitely bounce. Based on this development, the bank will initiate a criminal case for the bounced cheque. A person with a criminal case against him in the UAE cannot leave the country, nor can he get his visa cancelled or transferred. If the defaulter somehow manages to abscond or leave the country, the immigration police will issue a notification to arrest him.

Once such an alert is issued, the defaulter won’t be able to enter or leave the UAE or any other GCC country without getting arrested. And if he is arrested, he will get a jail term. Even after completing the jail term, the defaulter won’t be freed from his financial liabilities and he may continue to languish in jail – until the debt is cleared.

This happens due to the lack of a functional insolvency law in the UAE. However, it is learnt that a draft of the much-needed insolvency law is awaiting approval of the Ministry of Justice. Once it is approved by the ministry, the draft legislation will have to get necessary approvals from the council of ministers, the Federal National Council and finally the President’s office, before it is enacted into law.

MENA (Middle East & North Africa) becoming an attractive investment destination for Venture Capital and Private Equity Investments in the online.

Rocket Internet, a company founded in 2007 by the Samwer Brothers in Germany is making news for acquisitions as well as creating businesses in eCommerce, Marketplaces and FinTech space. The company aims to be the largest internet player outside of US and China. The question is if the market outside the US and China is large enough?

If population of the world outside US and China is any indicator, the number is a mindboggling 5.5Billion with a large part coming from the Indian subcontinent. The other major market is MENA (Middle East and North Africa). MENA is the fastest growing smartphone market with high penetration of internet usage. A few of Rocket’s investments in the recent past include Namshi.com, Lamudi, Helping – a home cleaning service, and Easy Taxi. Rocket also recently acquired food take-away platform Talabat.com for US$170 million making it just the 2nd largest deal after Maktoob. MENA is not just attractive for Rocket. Hatcher, a Singapore based VC along with iMENA recently invested in FinTech venture Telr an online payment gateway. Hatcher also helped an investee company ApexPeak to acquire Cashonomix, a UAE based FinTech startup.

MENA based funds are now seen competing with funds based in Europe and Asia Pacific to capture the promising names in MENA. Abraaj announced the US$100million investment in Turkish eCommerce giant Hepsiburada.

The hottest space remains eCommerce followed by marketplace. A number of successful online models in the west are yet to be tested in MENA which makes the market interesting for VC/PE funds. With banking space still nascent in MENA compared to the West and Asia, there are expected to be investments likely in the Financial Technology space. A few recent investments in the FinTech are compareit4me, Cashonomix and Telr.

Of course, companies can be built by bootstrapping or through external funding. Both the decisions have their own merits and demerits. It is a choice made by the founders based on their conviction to decide what option to choose. According to Deepak, Banking Director at MoneyGulf, “we have bootstrapped and focused on our cash-flows from day one of our business. We are fortunate to have the choice of delaying the decision to take external funding as long as we want”. The future would tell us the story of which decision was better but one thing for sure is that we will have a handful of big winners in the next 3-4 years in MENA that will make Maktoob and Talabat deals small. Inshallah!