Small Cog In The Wheel

The large proportion of small medium enterprises is tying their progress with the health of local economies.



Small business

As it turns out, a large number of small and medium sized enterprises (SMEs) in the UAE are overlooking key risks to their businesses. If a recent survey is to be believed, they appear to be focused on risks affecting their bottom line such as competition and customer demand. But when it comes to more catastrophic risks, such as fire, supply chain disruption and the health and safety of employees and customers, the cause of concern is less.

Findings of the 2014 Global SME Survey by global insurer Zurich and Dubai SME wouldn’t have raised too many eyebrows but for a simple reason – SMEs represent over 90 percent of companies in the UAE and account for more than 85 percent of jobs in the private sector. This makes them integral to the health of the local economy.

The good news is that the concerns are arising out of positive territories. Similar surveys, published in September and October, found that more than a quarter of SMEs in the UAE expanded their domestic sales last year. It was also revealed that SMEs are bullish about the opportunity to acquire new customers.

So the lack of attention to some critical areas may not necessarily be having an impact on the bottom lines even though the same cannot be said about the future. According to the latest survey, one in three SMEs (33 percent) cite high competition as a key risk, while 20 percent are concerned about weak consumer demand. Legal and fiscal problems (16 percent) rank third among the biggest risks listed by SMEs in the UAE. On the whole threat perception appears to go side-by-side with the learning curve.

The survey was conducted through a comprehensive process. As many as 3,800 senior executives of SMEs around the world, including 200 in the UAE, were asked to rank the top three risks faced by their businesses. Interestingly, it found that only about one-in-ten SMEs in the UAE (11 percent) believes fire to be a major risk, despite regular reports of fires destroying business premises across the country.

Just around 8 percent view the failure of partners and suppliers as a risk to their business. The survey established that health and safety of customers or employees is another risk that SMEs in the UAE underestimate, as it only concerns 14 percent of businesses.

The picture gets clearer only when one contrasts these figures with those outside the region.

For instance, in countries such as Austria and Germany, 32 percent and 24 percent of SMEs respectively considered customer or employee health and safety a key risk, the second most common response in each country.

However, the UAE-wide survey had its own crests and troughs even as improvements were registered within some indices too. For example, cybercrime, damage to company vehicles and natural catastrophes or unpredictable weather registered significant growth as perceived risks.

The number of SMEs concerned about cybercrime increased from 6 percent in 2013 to 10 percent in 2014 while concerns over natural catastrophes and the weather were up from 4 percent to 8 percent in 2014. “Running a business is risky. It is one of the reasons we admire people who launch, lead and work for SMEs,” says Zahir Sharif, retail director at Zurich Insurance Middle East.

According to him, these findings strongly suggest that SMEs in the UAE are far more focused on risks affecting their bottom line than asymmetrical risks like supply chain disruption or fire that could destroy their business.

Threat perception

There may be standard prescriptions for dealing with risks but one firm’s approach differs from another. However, more and more stakeholders are now emphasizing that ignoring certain risks might have a debilitating effect in the long run. “SME entrepreneurs often invest their own money as well as their time, talent and energy to realize their dream of owning and managing their own business,” says Clint Draper, head of SME at Zurich Insurance Middle East.

According to him, their role as an insurer is to help these businesses prioritize their risks and protect themselves against them. “Having the correct insurance can mitigate the risks, protect cash flow and provide a stable foundation for long-term success,” says Draper.

Call it straight sales pitch from a service provider – and there have been quite a few such advisories – but the fact remains that those involved are beginning to take notice. Abdul Baset Al Janahi, CEO of Mohammed Bin Rashid Establishment for SMEs (also called Dubai SME), says that SMEs in the UAE need to seriously address gaps in their exposure to risk.

“SMEs that understand business risks and take measures to protect their businesses tend to benefit in the long term. While our SMEs are generally doing well, they should not take their business growth for granted,” he says.

Steps have been taken at various levels to address this situation. In April 2014, Dubai SME signed a MoU with Zurich to provide insurance advice and risk management insights to the Dubai SME100 firms. It offers bespoke insurance advice to these firms. Earlier this year, Gulf Finance Corporation (GFC), SHUAA Capital’s wholly-owned lending subsidiary, partnered with Dubai SME to host the first in a series of workshops.

Aptly named ‘SME Essentials’, the workshop informs SMEs about ways to obtain enhanced access to growth capital. Dubai SME considers educating SMEs on access to funding as its top priority.

According to CEO of GFC, David Hunt, SMEs in the UAE are typically fast-growing companies that require swift access to tailor-made financing solutions to support their development; services that conventional banks don’t always offer. “GFC can assist by offering a wide range of financing products specifically designed to suit the specific needs of individual companies, and has the ability to quickly turn around loan requests,” he says.

Dubai SME data reveals that 95 percent of registered businesses in Dubai consist of SMEs and they contribute more than 40 percent to Dubai’s GDP and 42 percent of its employment. Yet, they receive only 4 percent of bank lending.

Lending has been a problem area even though it is understood that SMEs do not require big bucks to become operational. UAE-based online peer-to-peer lending platform Beehive said recently that SMEs require small loan amounts over the short-term, to fund business development and growth, than many investors may have thought.

Typically, SMEs in the UAE are often only looking for funding from between AED 100,000 to 500,000 (Beehive’s current average is circa AED 300,000), it said. Yet they are often frustrated by traditional lenders, reluctant to finance them, given their survival rate.

Since its soft launch in October 2014, Beehive has funded six UAE-based businesses, providing a cash injection of between AED100,000 to 500,000 each, lending a total of almost AED 2 million, provided by more than 500 local investors. Coffee Planet, an SME 100 company and provider of premium fresh coffee to hotels, restaurants, and catering companies, was the first SME to be funded by Beehive.

The Dubai-based company was looking for growth capital to secure small asset purchases in order to extend brand presence in the region and Asia as it develops a solid franchising, retail and distribution model.

“Coffee Planet is a perfect example of a stellar, home-grown company with solid business credentials that Beehive is keen to support on the platform. With banks focusing on the larger corporations, the options to secure SME funding are limited. However, many small businesses are looking for smaller amounts of capital in order to kick-start the next phase of growth,” says Beehive Chairman Rick Pudner.

The P2P platform gives SMEs a 14-day funding period from initial listing to actual funding (subject to due diligence) – a fraction of the time that traditional lenders offer.

Banks are also becoming aware of the need to open their cash registers for SMEs. The National Bank of Abu Dhabi, for instance, launched an award recently as part of its efforts to support SMEs and promote entrepreneurship in the UAE. The insurance sector has probably been the most active in trying to grab the opportunity created by SME businesses.

Non-life insurer AXA Gulf recently launched a dedicated sales unit offering insurance solutions for SMEs in the UAE. Its study reveals that only 11 percent of SMEs were fully confident of their insurance company. They still see obstacles with growing business and cite a lack of confidence, over-complexity and lack of knowledge of the importance of explicit insurance. The study also showed that SMEs often prefer to remain uninsured or underinsured as they are under the impression that their key risks cannot be covered.

Focus on performance

Another area that has benefited due to renewed focus on SMEs is corporate governance. It was announced earlier this year that Dubai SME has engaged and partnered with IFC, a member of the World Bank Group, to enhance corporate governance capabilities of the Dubai SME100 companies. Dubai SME co-organized a two-day workshop with IFC to help CEOs of these companies and their senior management teams to improve their corporate governance practices, and highlight its role in fostering sustained enterprise growth.

Dubai SME100 identifies the top-performing SMEs in Dubai to help groom them into bigger and more sustainable enterprises, and support them through their growth into larger, internationally-oriented companies. Al Janahi maintains that SMEs play an essential role in developing the economy as they are the source of innovations and new business creation and are a powerful driving force for private sector growth and development.

“Dubai being a non-tax economy, it is critical that our SMEs start early in their corporate governance journey; as this will help them achieve a more professionally-managed organization in the long term. This will in turn help them attract good talent, clients and investors,” he explains.

The proverbial gap between the cup and the lip is narrowing for SMEs in the region. If there are gaps, they are being addressed, challenges are being tackled and the ground is being prepared for a greater surge in the future. However, Roberto Mancone, head of Global Business Products, Deutsche Bank, believes there is an urgent need for dialogue and consensus on the priorities facing SMEs as we now enter what can officially be called The Age of the SMEs.

“The emergence of the much-discussed West-East corridor opens up fresh opportunities, but also poses questions about pricing and competitive advantage that many SMEs won’t always be equipped to handle,” he says. It is inputs such as these that led to an event – SME Beyond Border – which provided a vital toolkit on key issues. The more such initiatives are launched, the better it will be for all SMEs.