61pc Saudi SMEs set up without feasibility studies

Two thirds of the businesses that did carry out a feasibility study did not employ a professional to do the job, but instead relied on personal efforts that affected the results, the daily reported on Saturday. As a result, this affected the business's performance negatively.

The study estimated that a total of almost 10,000 SMEs fail each year and quit the Kingdom's marketplace.

According to Dr Aref Muhammad, an economic expert, there are several reasons these businesses do not succeed. He said that the main reason is that the owners of SMEs do not seek the advice of official legal consultants, and that exposes them to many legal and financial problems leading to bankruptcy.

In a recent questionnaire by the Riyadh Chamber of Commerce and Industry, 46 per cent of the respondents said why business owners do not prepare feasibility study was because they do not realise how important it is. Thirty-five per cent of the people questioned did not know how to prepare one. Nineteen per cent said that they lacked finance. Only 24 per cent of new businesses are based on feasibility studies.

Most of the businesses that do not follow any planning are commercial businesses. The survey found that only seven per cent of commercial businesses prepare an annual business plan and none of them have a budget.

One of the reasons for this lack of planning is lack of know-how. Other problems include lack of a management system, organisational structure and hands-on management where many depend on unqualified but cheap foreign labour.

However, construction work businesses are the most planned with 57 per cent of them preparing an annual plan and a budget estimate.

Meanwhile, a study carried out some time ago, highlighted the need to establish a finance company to support SMEs.

"We consider that the appropriate legal structure of the private company can be a limited company or a closed joint stock company in the beginning. The company can be converted to a full fledged joint stock company at a later stage. However, the appropriate legal structure can be finalised after the key investors' interest in the venture is confirmed," it said.

The study acknowledged that SMEs play a major and vital role in the economic development of a country through their contribution to GDP and employment. "SMEs are an integral part of an economy and an important supporting source of components and material for the larger industries and businesses," the study said.

It explained that SMEs needed further encouragement to play a more effective role in the development of the economy in general and the industrial sector in particular. "In this respect, there is a possibility of establishing specialised institutions to support SMEs and to help them overcome their technical, administrative and financial difficulties," it suggested.

The survey noted that despite the importance of SMEs in the economy, these were unable to benefit from the incentives provided by the government and, due to their small or medium size, commercial banks viewed them as high risk borrowers and hesitated in funding their needs.

The survey revealed that a large number of respondents — 59 per cent, were interested in approaching the new finance company for their financial needs.

Nearly 36 per cent said "definitely yes" and 23 per cent stated "possibly" or "may be" when asked whether they would borrow from the new finance company.

As for preference for Islamic or non-Islamic banking services, the overall response was evenly balanced in favour of both with some degree of variation between the number of respondents and amount of loan.

The preferred products for SMEs for Islamic banking services were Murabaha, Musharka, and Ististanea, whereas for non-Islamic banking short-term loan up to one-year, Letter of Credit, bank guarantee and working capital were preferred.

A total amount of loan of SR162.71 million was required by SMEs covered in the survey, of which SR83.35 million or 51 per cent was by those favouring Islamic banking, and SR79.36m or 49 per cent, by those interested in non-Islamic banking services.

The survey also showed that a large number of SMEs were not satisfied with the existing banks/financial institutions. They found the loan procedures very complicated. Most of the SMEs were unable to meet the demands for personal guarantee and securities.

Most of the respondents agreed that banks were generally too rigid with their terms, existing loan procedures were too cumbersome and there was too much hassle obtaining loans.