SME sector in GCC has potential to reach $920bn value by 2022

▶ Could employ 22 million people across the region within five years

The small and medium-sized enterprises (SME) sector in the six-member economic bloc of the GCC has the potential to grow close to US1 trillion in size and employ about 22 million people by 2022 as the Arabian Gulf economies continue to push for diversification.

The size of the SME sector could reach $920 billion, expanding about 156 per cent from the current levels within the next five years, Mena Research Partners (MRP) said in a study released yesterday.

The GCC SME sector, however, currently accounts for only 34 per cent of the broader Middle East and North Africa (Mena) region’s SME sector. With about $360bn per year, the equivalent of 26 per cent of the Mena GDP, it has huge potential for expansion as it is growing from a relatively low base.

The SME sector in the Mena region, a proxy of entrepreneurship, according to MRP, is estimated at about $1tn per year. In the developing countries, this sector represents about 50 per cent of GDP. The World Bank estimates that there is a financing gap of up to $2.6tn for formal and informal SMEs.

“Most of this growth is expected to come from key geographies such as the Saudi Arabia and the UAE, which are giving high priority to SMEs across many new regulations, policies and initiatives with the aim of boosting their share in the national economy,” said Anthony Hobeika, the chief executive at MRP.

Both the UAE and Saudi Arabia, which are trying to diversify their economies in the wake of lower oil prices, have set aggressive targets for SME participation in the economy. Under its Vision 2030 programme, Saudi Arabia – the region’s biggest economy and Opec’s top oil producer – aims to increase the share of SMEs in its GDP from 20 per cent to 35 per cent. The UAE, in its Vision 2021, has set a target to increase the share of SMEs in its non-oil GDP from the current 60 per cent to 70 per cent.

“SMEs are the main engine for job creation in the GCC region,Mr Hobeika said. “Current SME employment is estimated at around 17 million people with a potential to reach 22 million in five years, a rise of around 30 per cent, or the equivalent of 55 per cent of the total active population,”

The sector, which is considered the engine of growth, has suffered in the past few years on the back of economic slowdown, which subsequently gave rise to the defaults on bank loans, particularly in the UAE.

Lenders who were bullish on unsecured SME lending until the start of 2015 had to book losses and have since either stopped lending to SMEs entirely or extended only secured finances to smaller-sized companies.

Noor, headquartered in Dubai, is the latest UAE lender to move away from SMEs.

“Unsecured lending to SMEs is not something we will do,” Reuters cited the Noor chief executive John Iossifidis as saying. “The whole banking sector was doing unsecured lending to the SMEs and that is why we [the sector] got into the problems.”

Banks across the region currently allocate only 2 per cent of their loan books to SMEs, compared to 13 per cent in the rest of Mena. The percentage is much higher in some other developed countries, according to MRP.

Capital markets, in particular initial public offerings, remain closed for SMEs as no substantial funding has been raised from regional stock markets over the past few years. Regional governments, however, have adopted a number of initiatives to create and promote the SME ecosystem and many have established specialised bodies, set up special funds and developed new regulations to boost the SME sector, it added.