SME Funding – The Quintessential
Dilemma
10th World Islamic Economic Forum
Dubai
29th October 2014
1
CONTENTS
I.
II.
III.
IV.
V.
Introduction and Observations
SMEs and UAE Banks
Life Cycle of SMEs
The 5 issues which challenge banks
Brief on Alvarez & Marsal
2
SME – A Distinct Segment
SMEs are a very distinct segment; they lie between classical retail and established corporates
My involvement ..
..with SMEs since 1995 and in three countries – Canada, UAE and Kenya
Very similar issues in all markets
Access to funding
Access to markets
“Unbankable”
Lack of corporate governance, business planning and appreciation of risk
Government initiatives have mixed results
There is a growing demand for Sharia compliant products by SMEs in GCC, Sub Saharan Africa and
Pakistan. We expect this to extend to North Africa as soon as enabling legislation is passed in
Morocco, Tunisia and Algeria
A significant number of Sharia compliant banking customers are first time borrowers
Alvarez & Marsal (A&M) is a multi-disciplinary consulting firm with a team of practitioners, and is
committed to helping develop & implement SME finance strategies
3
Personal Observations – a Macro View
SMEs are the most critical contributor to economic growth
No debate on SME’s importance to the economy – although contribution numbers vary in
relation to contribution to GDP and employment creation
No debate on the need to “do something” or “do more”
Number of advisory initiatives at various levels with varying success
SMES cover a wide spectrum – early stage vs established SMEs
Balance between expat and locally owned SMEs
Anecdotal evidence, and discussion with bankers, indicates that SMEs fared better than
corporates in the last downturn, with the exception of
o trading companies
o businesses with heavy real estate exposure
o where working capital lines for utilized for purposes other than core business activity
4
Personal Observations – The SME Client
To an SME customer, deadlines of time and excellence of service provided is as critical as it is to a
very large corporate
SME customers tend to be much more passionate about their business
There is often more than one generation involved
Their lifestyle is very closely linked to the business
There tends to be a mix of personal and corporate assets
Audited information not necessarily complete or sufficiently detailed
Management is thin, decision making is centralized, business planning is not regimented
They tend to be very loyal to their bankers ((Does not usually work the other way!)
Not all successful SMEs dream of becoming large corporates
Successful SMEs tend to find niches where they have relative advantage of cost, service quality,
even innovativeness
SME banking is fundamentally relationship management; close and regular contact is critical
It is not – as sometimes perceived – a high risk proposition
5
CONTENTS
I.
II.
III.
IV.
V.
Introduction and Observations
SMEs and UAE Banks
Life Cycle of SMEs
The 5 issues which challenge banks
Brief on Alvarez & Marsal
6
IMPORTANCE OF SMES
SMEs contribute directly towards sustainable development and growth of a country’s economy and
human capital, while being of strategic importance for the growth of commercial banks
FOR MARKET & ECONOMY
Create a knowledge-based society
Breed innovation
Diversify the economy
Promote international trade
Create new sources of employment
Form a competitive marketplace
FOR BANKS
Vendor financing of existing large corporates,
which leads to larger wallet share
Deal flow for traditional corporate lending, as
SMEs grow
Diversifies risk with small-ticket exposure, while
providing high fee income through transaction
banking and trade finance
Cross-sells Wealth Management products to
owner-operators
Strategic & sustainable development of the human, social and economic capital of the UAE
7
Common SME Hurdles
Universally, particularly in developing economies, SMEs face the same issues and hurdles
Type
Observations
Social
Entrepreneurship not seen as prestigious. Comfortable government jobs preferred over the
hustle of entrepreneurship
Capital
Limited availability of capital, especially seed & VC funding. Banks unwilling to lend to
smaller enterprises and impose onerous requirements
Policy
Lack of policies that are supportive of SME formation and growth (e.g. long registration &
licensing times)
Labour
Scarcity of skilled workforce and restrictions on importing talent is an impediment to growth
Education & Training
Even for the limited capital destined for investment in private enterprise, there is an acute
shortage of qualified proposals, and by extension, entrepreneurs
Essential Services
Basic services (e.g. utilities) can take months to secure, burdening newly-formed companies
Business Support
Costly business support services limit the ability of SMEs, especially start-ups, from availing
such services
Opportunities
Limited domestic market size and not enough access to international markets
8
Challenges Faced by UAE Banks in Lending to SMEs
Majority banks in the UAE are reluctant to lend to SMEs because of the high perceived risks, particularly
credit risk. The growth opportunity for banks lies in a better understanding of the SMEs and their risks
73%
Reasons for Bank's Refusal to Lend
55%
45%
27%
High risk of
Management
business failure competence
Insufficient
collateral
Almost three quarter of banks in the UAE refuse
to lend to SMEs because of the high perceived
risk of business failure. Another major reason is
a view that management of the SMEs are not
competent enough to run the business.
Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014
Financial
factors
18%
18%
18%
Absence of
audited
financial
information
Absence of
viable exit
strategy
Tenure of
business
Almost half of the SMEs in UAE do not have
sufficient collateral for banks to feel secure to
lend to them.
Other reasons that cause banks to shy away
from lending to SMEs is lack of sufficient
working capital and lack of financial strength of
SMEs.
9
Areas of Importance to Banks for Lending to the SME
The number 1 and 2 areas of importance to banks lending to SMEs is Collateral and Business Risk
Collateral
Collateral
•
•
Insufficient collateral
No security coverage
Business
Risk
Business
Risk
•
•
•
Industry sector
Viability of business model
Operations of SME business in general
Financial
Risk
•
•
•
Financial stability of the SME
Quality of cash flow
Ability to withstand losses
Legal &
regulatory
concerns
•
•
Absence of credit bureau in the country
Limitations with legal enforcement in case
of defaults
Financial
Risk
Legal &
Regulatory
Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014
10
Size of Opportunity is Immense in the UAE
Despite the strong desire amongst banks to lend to SMEs, almost 40% do not have an SME business
Percentage of Banks Lending to SMEs
Portion of each bank's lending to SME sector
No Comment
9%
No
39%
>50%
18%
Yes
61%
0-10%
46%
26-50%
9%
11-25%
18%
Many SMEs initially rely on internal sources of funding but, once they are in a position to grow, they need to find other
sources of capital. The challenge faced is not many banks in the UAE lend to SMEs and, of those that do, only a small
portion of their book is allocated to SMEs
Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014
11
UAE Banking Sector & the SME Segment
The UAE has entered a new phase of development and, recognizing the role SMEs play, some banks are
gearing up to help promote a robust SME segment & further support job creation & economic activity
Internal capacity building to increase their SME lending portfolio
Business Initiatives
Technical assistance and training to enhance awareness for the needs of the sector
SME finance technology
SME credit risk mitigation products and systems
Major Initiatives
Development of SME finance training modules
Assistance to selected firms in development of project finance proposals
Business environment that is not prone to small-scale investments
Limited financing from the banking sector - current rejection rate stands at 75%
Constraints
Insufficient regulatory support with respect to SME finance
Large number of SMEs are unaware of their being “bankable”
Quality and standardisation of business processes and services
Managerial and technical skills
Core Business Areas
IT and information support (MIS)
Research and development of under-developed business sectors
Private equity and investment climate
12
CONTENTS
I.
II.
III.
IV.
V.
Introduction and Observations
SMEs and UAE Banks
Life Cycle of SMEs
The 5 issues which challenge banks
Brief on Alvarez & Marsal
13
SME Requirements Across Life Stages
In creating solutions and products for the SME segment, it is important to understand the changing
needs of SMEs and how these interact with each other, as the SME evolves across life stages
(0 – 3 years)
Life Stage
Concept Stage
Initial Formation
Debt products
required
Equity sources
Proof of Concept / Proof
of Value
Evolving finance
needs
Equity Programs
Markets served
Supporting services
needed
Early Stage
(3 – 5 years)
(5+ years)
Growth / Expansion
Established / Maturity
Limited debt (e.g.,
physical assets)
Basic suite (e.g.,
factoring)
Broader suite (e.g.,
trade finance)
Full suite (e.g., term
finance)
Angel
Venture Capital (Stage1)
VC (stage 2)/ Private
Equity
Private Equity
Debt Programs
Local
Knowledge transfer
Hand holding
Mentoring
Monitoring / Relationship Management
Business services (e.g., ICT, Real estate)
Networking
Local & national
.
National & explore
exports
National, regional/
international
Knowledge
Advisory
Information
Global access
Monitoring
Business services
Information
Global access
Monitoring
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Borrowers Life Stages and the Funding Gap
There is a large gap between Consumer and Wholesale banking, the customers as their business grows will change banks or
will be continued to be provided consumer banking products who now will require more sophisticated wholesale products
Current Gap
Consumer Banking
• <50m borrower
turnover
Emerging Corporates
/ SME Banking
• 50 - 250m in
borrower turnover
Wholesale Banking
• >250m in borrower
turnover
Typical Customer’s Lifecycle
Current GAP
Consumer Banking
Client centricity is diminished as
there is a break in the clients
journey
Creates a loss in revenue & clients
Cost of retaining existing customers
is more cost effective than
acquiring new customers
15
CONTENTS
I.
II.
III.
IV.
V.
Introduction and Observations
SMEs and UAE Banks
Life Cycle of SMEs
The 5 issues which challenge banks
Brief on Alvarez & Marsal
16
Borrowers Life Stages and the Funding Gap
It is important for banks to better understand the need of SMEs, as a segment rather than a sector
The desire to force fit into Retail or Wholesale
The presumption that characteristics of SME are the same as that of top end retail or low end
wholesale
Pre disposition that SME is highly risky
Non availability of granular MIS to manage the business
Lack of documented underwriting policy
Unclear procedures for handling any exceptions
Lack of a robust remedial function (as opposed to Recovery)
Not having the right skillsets in the team
17
Understanding the SME Segment’s Needs
A hybrid approach for the SME segment is the most effective for banks, combining the personalized touch of Retail Banking
(relationship management) with the depth of Wholesale Banking (risk management)
Relationship
Management
Strong relationship focus – individual relationships more important than institutional
RMs must understand SMEs; be focused on finding solutions; hand hold clients; very strong on ethics – building
trust is key for relationship management
Approach to
Market
Individual RM driven / Team Leader override - Previous relationship helps
Service providers (accountants/lawyers) are key referral sources
Reliance on audited accounts not sufficient
Product Type
Business Account Bouquet, with Overdraft & Short Term Loans (asset backed)
Transaction Banking and Trade Finance (LC/TR)
LBD/EBD
Repayment &
Collections
Zero tolerance on overdues; tolerance on reporting delays. Clarity of underwriting criteria essential
Detailed – but not heavy – analysis required
Short form credit application plus clarity of essential information that is required
Credit
Extension
Depending on size of loan and type a mixture of Classic Retail and Wholesale
Handholding may be required;
Skill set of “problem solver” needed not that of recovery
18
CONTENTS
I.
II.
III.
IV.
V.
Introduction and Observations
SMEs and UAE Banks
Life Cycle of SMEs
The 5 issues which challenge banks
Brief on Alvarez & Marsal
19
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