Saudi Arabia sees potential in SME growth

Investment in small and medium enterprises in Saudi Arabia is expected to grow to more than USD 70 billion by the end of 2015, with the government and banks providing much-needed funding, according to industry data compiled by Zawya.

The sector's contribution to the kingdom's gross domestic product could rise to 37% by the end of 2015 from 35% a year earlier; in line with forecast growth in the number of licensed SMEs to some 2.5 million by end-2015 from 1.97 million as of January 2014.

But Mohammed Albelaihed, director of the SME center at the Council of Saudi Chambers, said only 71% of the enterprises were operational, while 29% have shut down due to financial difficulties.

He said 85% of enterprises are single proprietor companies.

"Developing the sector as a significant contributor to the Saudi economy requires establishing an independent authority that will put in place the required framework, regulations, policies and legislation to support and further the cause of SMEs," Albelaihed told Zawya.

He said Saudi banks could play a bigger role in supporting the sector by providing tailored finance solutions and services.

KAFALA DRIVES SME LENDING

Abdullah Marei Bin Mahfouz, board member of the Jeddah Chamber of Commerce and Industry , said commercial banks have become more involved through an SME loan guarantee program, known as Kafala.

The government established Kafala in 2006 through the Saudi Industrial Development Fund to act as a guarantor to banks providing credit.

The program provided guarantees worth a total of SAR 3.59 billion by the end of 2013, while financing extended by participating banks amounted to around SAR 7.18 billion.

"Some banks are still concerned about financing SMEs due to the lack of sufficient guarantees such as market and feasibility studies, as well as the absence of a party that insures their loans, which often leads to the failure of some projects," Bin Mahfouz said.

Industry experts said that in addition to the challenges faced by SMEs in obtaining licensing and funding, many proprietors lacked administrative and financial expertise.

Ziad Al-Bassam, who is responsible for SME projects at the Jeddah Chamber of Commerce and Industry, said there were no programs available to develop production, marketing and technical capabilities.

He also said there was a need for more information about the scope of business or financials of many enterprises.

SMEs employ over 4.5 million people, mostly foreignworkers. The sector's financial investments are estimated at SAR 250 billion (USD 66.6 billion), according to a 2013 report by the Gulf Organization for Industrial Consulting.

"Owners lack administrative and financial expertise, which is considered a major obstacle for developing the projects and negatively impacts how products are marketed. These could lead to major financial loss," Bin Mahfouz said.

Of the various industries in Saudi Arabia, 55% percent of SMEs have set up in the construction and contracting sector.

The SME sector comprises micro-enterprises and small- and medium- enterprises categorized by capital, as shown in Table 1 below.
 

The government, for the first time, listed development of the SME sector among the goals of its 2010-2014 development plan as part of efforts to diversify its economy, which is mostly driven by the oil sector.

"The plan focuses on the importance of removing the barriers limiting the development of SMEs and intensifying the government and private initiatives to support it," said Ahmed Yehya, head of Kafala's research and analysis unit.

He said this could be done by encouraging financial institutions to increase funding, building a database for SMEs in the Gulf Arab state and conducting a feasibility study on soft loans for technical development in medium-size enterprises.

The finance ministry already provides loans to enterprises working in the education and healthcare sector; the program has provided SAR 5 billion in funding since it was launched in 2006.