SMEs an attractive lending target for banks in the UAE

The recent emergence of SME loan portfolios as a strong asset class for banks has a lot to do with the abundant liquidity and the relatively high concentration of their assets in the real estate sector. In addition, a majority of banks, which reported three-digit growth in their profits, made it mostly from stock market linked businesses.

"Strong profits have been a function of the performance of the equity markets, IPO financing and subscriptions, and asset growth in a rising interest rate environment," said Tammam Barbir, banking sector analyst at EFG-Hermes. Analysts say UAE banks need to enhance their core banking incomes from a strong and sustainable asset base. While the big ticket project financing is an obvious opportunity, bankers have started recognising the huge opportunities available in the fast growing SME sector.

RAKBank, an aggressive retail sector player is keen on building a strong base in the SME sector. In addition to better spreads, the bank views lending to SMEs as a less risky.

Currently, RAKBank's loan book has an overwhelming 93 per cent in retail loans. Emirates Bank Group, a pioneer in SME sector lending was instrumental in setting up the 'Al Tomooh' programme, which funded several local small business projects during the last four years.

Till recently, banks of all types and sizes were engaged in wooing the retail customers as SMEs were neglected or treated as too risky to lend.

"While a middle income retail customer could get a few hundreds of thousands of dirhams as loans without any collateral except an employment letter, a company with a few millions in turnover was asked for all sorts of securities. In most cases the applications were rejected under the pretext of some technical reasons. Fortunately the situation is changing," said Amin Shehsad, who owns a metal fabricating unit in Dubai.

A major complaint against the local banking system has been its lack of innovation in supporting the SMEs. A recent study by the GCC Directorate showed that SMEs represent 90 per cent of enterprises in the GCC countries, while in UAE, small firms represent about 94.3 per cent of the country's business establishments.