SME in UAE & KSA: An Overview
The core of the economy is comprised of small and medium-sized businesses (SMEs). They account for 90% of all enterprises and more than 50% of all jobs globally. In the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA), SMEs are at the forefront of the political agenda.
These nations work to diversify their economies in order to produce more steady and environmentally friendly economic growth that is less dependent on oil. Long-term diversification through the growth of SMEs is essential since industrialized countries‘ demand for fossil fuels is anticipated to decline as they fulfill their commitment to switching to greener energy sources.
Small and medium-sized businesses continued to thrive even during the Covid-19 epidemic, positively influencing job creation throughout the kingdom. Saudi Arabia’s Vision 2030 initiative, led by progressive leaders like King Salman bin Abdulaziz & Prince Mohammad Bin Salman, continues to encourage Small Enterprises through a number of reform programs designed to diversify the economy with a special emphasis on local capabilities. The ultimate goal was to increase the share of SME in the Arab world GDP from 20 to 35 percent.
SMEs and Vision 2030
Government assistance to the corporate sector during the height of the epidemic was crucial in reducing the adverse effects of the world financial crisis. Support packages totaling $61 billion were extended, with $13.3 billion of that amount going towards easing the burden of SMEs’ reduced cash flows. In the KSA and the UAE, the MSME sector contributes around 30% and 40%, respectively, of the GDP, and it is expanding quickly. For instance, between 2016 and 2021, SMEs contribution to Saudi’s GDP increased from 29% to 45%.
What is an SME?
SMEs are companies with revenues, assets, or staff counts below a specific level. The criteria for what qualifies as an SME varies in each country. SMEs are companies with less than 250 employees and a yearly revenue of somewhat less than 200 mn riyals in the UAE and the KSA. Businesses can range from individual craftsmen with few employees to fast-growing companies that provide cutting-edge products and services. Around 70% of SMEs in both the UAE and the KSA are in construction and trading, with only 10% in manufacturing.
How crucial are SMEs for long-term economic growth?
An economy that is strong and sustainable must include SMEs. Their key advantage over larger businesses is their flexibility. They have the ability to innovate and act rapidly as market conditions change. More than 50% of the workforce in the private sector in the KSA is employed by SMEs, making them a significant force in local labor markets. 86% of the corporate sector workforce in the UAE is employed by SMEs. Small and medium-sized enterprises (SMEs) in Saudi Arabia provide wealth for the entire nation and allow for a fair distribution of revenue, all of which effectively support the growth of a sustainable and balanced economy. SMEs also offer significant job prospects at relatively cheap capital costs.
These companies are essential in the fight against the high rates of unemployment among the youth in the UAE (11% unemployment) and the KSA (28% unemployment). Throughout the Arab world, youth make up nearly 1/3 of the workforce, and SMEs offer the much-needed job options to take on freshers to the labor market. They promote innovation, generate job possibilities across a variety of industries and geographies, and give young workers a chance to enhance their skill sets. SMEs produced about 80% of the employment opportunities in the KSA in 2021.
Small and medium-sized businesses offer a variety of opportunities for women to develop their entrepreneurial skills. GCC accounts for the lowest rates of female labor force participation in the world (about 30% in Saudi Arabia in 2022 and 47% in the Emirates in 2021). The region’s SMEs enable increased economic inclusion and women’s economic empowerment. Since 2016, the proportion of female-led SMEs in the KSA has doubled, rising to 46% in 2022. In the UAE, women own 50% of SMEs. The development of the kingdom’s economy depends heavily on the SME sector.
Also Read: A Guide to Every SME Loan Solution
How efficient are SMEs in Achieving Finance Parity?
The vast majority of SMEs in the UAE and the KSA continue to encounter significant obstacles to their expansion despite being the backbone of local businesses in the territory. The absence of proper financial services is their biggest problem. The credit gap for SMEs in the GCC market is projected to be $250 billion in 2019. This credit gap refers to the discrepancy between the demand and supply for financing. Compared to 27% in OECD countries, the average percentage of SME lending to total loans in the GCC is only 2%. This is largely because of the historical nature of oil-based economies, which were dominated by very large corporations.
Both KSA and UAE have created sustainable plans for the development of the SME industry and have formed specialized organizations to provide focused assistance to SMEs. To enable SMEs to propel the expansion of Saudi Arabia’s economy, the Small and Medium Enterprises General Authority at (Monsha’at) was established in the KSA in 2016. A major goal of this program is to support SMEs through the government’s Vision 2030 initiative. One of the main goals of the Vision 2030 is to make it easier for SMEs to obtain financing. To this end, they urge the banking institutions to boost the percentage of loans they offer SMEs from 5% to 20%. The long-term objective is to increase the contribution of SMEs to the country’s GDP to 35% by 2030.
While banks and financial businesses have historically provided loans to SMEs, fintech has quickly emerged as an alternative source of funding. Because SMEs are seen as high-risk and receive inadequate servicing compared to larger corporations, commercial banks are typically hesitant to offer them loans. Fintech companies, on the other hand, use technology to simplify SME lending. These tech-enabled businesses have opened up new sources of funding for the SME sector and frequently provide more favorable terms than banks, which will hasten the expansion of SMEs.
The Bottomline
To ensure continuous growth in the coming years, SMEs must align themselves more closely with governmental programs. Small and medium-sized businesses already play a significant role in Saudi Arabia’s and the UAE’s economic growth, but more steps need to be taken to benefit from the opportunities presented by Vision 2030. For example, local capabilities should be built upon instead of relying on relationships, resources, or expertise from abroad.
The MSMEBlog provides expert solutions and guidance for financing small and medium-sized businesses. Visit https://www.msmeblog.com/ for more information on MSME finance.
