Report urges UAE reform to ease lending restrictions for SMEs

The DEC said changes are needed to increase support for SMEs which are “the engine” of the United Arab Emirates’ (UAE) economy.

The report, 'Understanding the SME financing dynamics', called for an easing of restrictions on who in addition to banks and financial institutions can take security so that a broader range of funding sources is available to SMEs, including from private individuals.

The DEC’s report also renewed calls for the establishment of a central registry for SMEs that would list their assets when they are seeking loans. The registry should be run by an independent government body, such as the Department of Economic Development, the report said.

Report co-author Amir Ahmad of Pinsent Masons, the law firm behind Out-Law.com, said: “Banks in the UAE lend against collateral and SMEs by nature are asset-light entities, so they are not really able to avail themselves of bank lending.”

Ahmad said: “Currently, early stage SMEs do not get any bank lending, while those in mid-maturity get anywhere between 10% and 20% of their funds from banks. That is not enough compared to economies similar to the UAE.”

Loans to SMEs in the UAE from ‘angel investors’, family and friends can only be made on an unsecured basis at present, Ahmad said. “Rules should change making it possible for angel investors or individuals to take security when giving loans to SMEs.”

According to the report, the “lack of an adequate security regime is a major reason for low bank lending” to SMEs.

The report also recommended setting up a separate court with “exclusive” responsibility for any legal action that might be necessary if SMEs default on financing agreements. “This would lend greater comfort to banks when considering lending to SMEs against security,” the report said.

Data from the World Bank’s Enterprise Surveys suggest that access to finance for SMEs is “more constrained” in the Middle East and North Africa (MENA) region than in other emerging regions, with only one in five SMEs having a loan or line of credit.

The World Bank said: “Principal constraints for SME lending include lack of SME transparency, poor credit information from credit registries and bureaus, and weak creditor rights. Yet until recently there has been no comprehensive survey of the supply of SME finance in MENA. SME policymakers may therefore lack comprehensive information to design reforms, while SME finance providers may not have access to valuable market information to inform design of SME financial services and delivery channels.”