Current State of Micro and Small Enterprises in KSA
Discuss about the Contribution of Micro and Small Enterprises.
The contribution of the Micro and Small Enterprises has not received its full potential but it is clear from the findings that they are on the right tract. The KSA government has engaged in various initiatives and programs that will help boost the growth Micro and Small Enterprises. Nevertheless, there is a need for much more to be done beyond financial access increment for this sector (Al-Khaldi & Wallace, 2009). Micro and Small Enterprises is the way to help the KSA to get rid of its overreliance on oil sector which is always prone to detrimental challenges due to oil prices fluctuations. As been seen from the discussion, comparatively, KSA Micro and Small Enterprises set the stage for the other economies in MENA or GCC region and this is a good news to the KSA’s economy.
It has been indicated from the study findings that KSA has over 1.97 million business enterprises with Micro and Small Enterprises sector taking the lion share at 90%. Moreover, it is also clear that over 85% of the Micro and Small Enterprises in KSA describes the single proprietor firms with about 74% being in trade and contrition sectors. The current contribution of Micro and Small Enterprises to the GDP of KSA stands at 33% (Asad Sadi & Henderson, 2011).
Nevertheless the KSA government should have it in mind that this figure is much lower in comparison to developed economies such as the United States. Even though it is known that the Micro and Small Enterprises’ contribution to the GDP of KSA economy is higher comparatively to other to other GCC economies.
There is a need to remind the government that the value of the programs and initiatives already invested in Micro and Small Enterprises sector remains comparatively high than the returns that Micro and Small Enterprises have remitted to the economy. Accordingly, there is a call to action that the government needs to make sure that KSA’s Micro and Small Enterprises reach the full potential.
The labor force intake by the KSA’s Micro and Small Enterprises is still relatively low at 25%. The government needs to encourage Micro and Small Enterprises to employ more by not only availing the financial based required by training and development of the Micro and Small Enterprises through upskilling and emotional support (Ghanem, 2013). The government should shift attention into helping the Micro and Small Enterprises to manage their firms effectively as this will boost the current 10% of the total workers employed by Micro and Small Enterprises to over 50% of the Saudi nationals compared to immigrants. It is quite unfortunate the despite the various and expensive programs driven by the KSA government to boost Micro and Small Enterprises, the KSA natives account for a minute percentage in their labor force.
Challenges and Need for Government Support
The government of KSA should realize that there is a great potentiality for the Micro and Small Enterprises growth and subsequent contribution to the country’s economic development. Since the country gives a home for over 20% of the entire Micro and Small Enterprises in the MENA region, it has the potential to greatly contribute to the economic growth and development. Moreover, KSA has stayed as the largest economy in the GCC coming second to United Arabs Emirates which is the most developed Micro and Small Enterprises sector in the GCC (Looney, 2004).
There is a potential for Micro and Small Enterprises in KSA to rise above those in the United Arabs Emirates. This is because KSA’s Micro and Small Enterprises average share lending of entire loans is currently 3% compared to the 2% for the GCC’s average. This means that KSA Micro and Small Enterprises have more access to loans and the capital required to start and run businesses. Moreover, KSA enjoys the largest number of both public and private Micro and Small Enterprises sector support programs with the GCC area.
This further points the potentiality to Micro and Small Enterprises have to become the number one contributor to the KSA’s economy in the entire MENA and GCC region. Moreover, lucrativeness of KSA is also much better than the G20 countries in terms of the cost of establishing a business in KSA. This is because it is currently estimated as one-third relative to the average G20 economies, hence a lucrative podium for the Micro and Small Enterprises budding.
Even the future examination or outlook of the KSA’s Micro and Small Enterprises sector is promising. It is has been ranked second with the MENA region with position being UAE based on the Ease of Doing Business Report released by the World Bank in 2015. Simply put, KSA has been ranked the uppermost for acquiring credit information among the MENA region economies.
The report by the World Bank indicated that KSA’s effectiveness of doing business based on ten parameters specifically on the basis of government business regulation on the basis of 2015 aggregate ranking and distinguished based on fundamental indicators as complexity and cost of regulatory process as well as measure of the strength of legal institutions. On the basis of this quantitative examination against ten parameters, KSA ranks forty-nine in the year 2015.
On the other hand, within MENA region, KSA ranks 2nd after the UAE. Moreover, KSA has highest ranking for obtaining credit information among every economies in the MENA area. Nevertheless, Micro and Small Enterprises authority requires to ease out the procedures for commencing a business as well as for undertaking globally.
Promising Future of Micro and Small Enterprises in KSA
Moreover, the EY held the EOY 2014 award in KSA which has served to encourage the Micro and Small Enterprises sector in KSA. The EY has subsequently built on the KSA Micro and Small Enterprises immense success program and subsequently declared the launch of the EOY 2015 award in KSA for the 2nd time. Also, the KSA’s youths have proved their entrepreneurial authorities and powers despite the average of Micro and Small Enterprises being merely seven years. The worldwide entrepreneurs have accelerated innovation besides creating job opportunities, specifically during the economic downturns.
The EY’s of EOY initiative or programs integrates as well as rejoice the vision, creativity as well as commitments of the most deserving global entrepreneurs. The KSA has had an opportunity to hold this program due to its place in the Micro and Small Enterprises sector in 2014. This means that KSA has had successful entrepreneurs and this even explains why the initial launching of program occurred in KSA. The Kingdom of Saudi Arabia should take the advantage of the benefit packages that this program comes with to boost the morale of their Micro and Small Enterprises to hit their full potential.
This is because the EOY carried out in 2014 emphasized specifically on the Micro and Small Enterprises together with fast-growth economies including KSA where Micro and Small Enterprises remains the chief drivers of growth and development of economy. The program has recognized KSA as one of the most competitive nations among the G20 cohort countries. KSA Micro and Small Enterprises should, therefore, grow faster than it is currently growing because the average time consumed to commence a business remains one of the lowest relative to the G20 economies. KSA is also an industrial hub in both GCC and MENA area besides having a firm together with growing economy. This indicates that the future decade bodes well for the Micro and Small Enterprises development in the country.
This is essentially as a result of the lack of targeted as well as customized assistance from banks. The government should take it upon itself to ensure that there is an effective targeted and customized banks assistance focusing on the KSA’s youths. Moreover, it is also clear that the youths have been demoralized by the lengthy bureaucratic procedures that present a daunting challenge to the KSA Micro and Small Enterprises sector. Even though the paper acknowledges the much efforts already taken by the KSA government to reduced or eliminate such bureaucracies, much is still needed to be done to ensure that an enabling environment prevails for the Micro and Small Enterprises to bud faster in the KSA’s economy.
It had been approximated that the investment of Micro and Small Enterprises at the end of 2015 would have risen to hit over USD seventy billion. It was also estimated that the Micro and Small Enterprises sector would be contributing 35% of to the GDP. However, it is clear that these estimation have not been achieved despite the government programs and initiatives.
The Micro and Small Enterprises sector and the government of KSA should shift focus on speaking to various challenges identified in the sector. For example, some of the shortcomings of Micro and Small Enterprises’ performance is primarily attached to the lack of targeted and ongoing support services. In KSA, capital access including debt and equity remains a principal challenge (Tuncalp, 2009).
The equity investment is crucial for any given survival of a venture in the initial stage, but in the KSA, there is inadequacy of angel investors as well as venture capital funds. The Micro and Small Enterprises capital lending is pegged at three percent in KSA as a percentage of entire loans. This is, however, stays low relative to the emerging economies’ average of twenty percent as well developed economies’ average of twenty-five percent.
Notwithstanding the substantial size of the Micro and Small Enterprises sector in KSA, financiers evade lending to the Micro and Small Enterprises sector for the following reasons:
- A general absence of reliable as well as accessible information regarding enterprises sine of which the registries together with bureaus are unable to issue credit scores.
- A lack of proven legal environment which permits for the collateral registry as well as legal enforcement where there is a default
- A great number of Micro and Small Enterprises lack audited financials. There is a need for the financial firms to consumer higher time besides resources when servicing Micro and Small Enterprises. This culminates in augmented cost of operation for these financiers that when incurred, become passed on to the Micro and Small Enterprises in terms of premium charges.
- Approximately eighty-five percent of the Micro and Small Enterprises are single-based proprietor’s corporations, and, hence, the separation between the firm and private assets frequently remain hazy. Accordingly, the Micro and Small Enterprises will have an increased lending risks. In light of this challenge, there is a need for effective policy techniques and tools to impart more confidence to the lending institutions through the management of the risks effectively.
Even though the amount of existing policies as well as tools remains enormous with some of the initiatives and programs are funded well and effective, the absence of strategic co-ordination empties into efforts duplication, therefore augmenting redundancies and cost. The government needs to come in further and assist Micro and Small Enterprises to speak to such challenging areas to the Micro and Small Enterprises including information related, managerial, technical, workforce related, marketing, financing as well as bureaucracy.
Even though the government has come in to reduce some of the procedures needed for new Micro and Small Enterprises set up, the KSA’s government strives to ensure that Micro and Small Enterprises get it much easier than before. This is because it is the KSA’s government to whom the lengthy bureaucratic procedure besides licensing is the potential barrier, succeeded by the non-existence of sufficient financing.
The Micro and Small Enterprises are also concerned with their rapid rate of lifespan shrinking. The lack of presence of the customized as well as ongoing assistance from the banks leading to the comparatively short lifespan of the Micro and Small Enterprises whereby the average Micro and Small Enterprises is barely 7 years old. The MENA area is specifically overwhelmed with this phenomenon.
There is a “missing middle” whereby the Micro and Small Enterprises have gone beyond the initial stages of the setup, but need additional support for sustaining as well as growing their businesses or ventures. Despite the government initiatives and programs in place, with sole target to Micro and Small Enterprises support, these programs and initiatives must be channelized as well as customized to speak to the distinct demands of the Micro and Small Enterprises’ entire lifecycle (Zamberi Ahmad, 2012).
The KSA’s banks should stretch past the provision of restrained subsidized loans alongside pre-investment training to sufficiently support the Missing Middle phenomenon throughout the various phases of development. Worldwide, between seventy and eighty percent pf the enterprises collapse after an average of barely twenty months. There is a need for the KSA to cater for its strong entrepreneurial bend of the youthful propitiators to address the eventual motive of the KSA’s youth employment alongside the consequent diversification of the KSA’s economy.
The KSA government has over the years, engaged in constructive moves towards the Micro and Small Enterprises sector’s growth. The government has emphasized more on the amount of Micro and Small Enterprises expansion than the available ‘gazelles’ that are poised to become internationally competitive as well as have the authority besides the power for diversification of the KSA’s economy. Nevertheless, the KSA’s government has acknowledged the need for a broad support base, alongside capital, business services as well as training in the entire lifespan of the Micro and Small Enterprises.
The KSA’s youth has proved its entrepreneurial power and blend besides the boost from the administrations has ensured that locals can favorably compete on an international arena. The KSA government must ensure that it implements effectively the plans it has made to emulate the Japan Micro and Small Enterprises growth strategy. The KSA’s Micro and Small Enterprises must strive to achieve the augmented growth as well set up themselves as competitive businesses internationally.
The Micro and Small Enterprises should take the advantage of the opportunity presented by the fiscal as well as social efforts taken by the Custodian of the 2 Holy Mosques’ government through King Salman bin Abdulaziz to blossom with vigorous growth in the coming years (Zamberi Ahmad, 2011). Moreover, the government’s concerted efforts based on their entire commitment and dedication stressed towards the policies implementations should be followed up to ensure that the Micro and Small Enterprises hit their eventual sustainable development as well as dynamic progression goals. In so doing, Micro and Small Enterprises in KSA will meet their full potential which will translate into increased employment, growth and development in KSA’s economy.
The KSA’s banking sector should also take the advantage of this lucrative opportunity presented by the Micro and Small Enterprises’ potential. These banking sector will have a substantial opportunity to benefit from the ever growing Micro and Small Enterprises. With Micro and Small Enterprises accounting for ninety percent of the entire registered KSA’s enterprises besides sixty prevent of the entire employment alongside their occupation of the central place in the KSA’s development strategy, Micro and Small Enterprises’ growing contribution to the Gross Domestic Product is clearer (Acs, 2006).
The banking sector will benefit by boosting the Micro and Small Enterprises sector through the prospects of growth in credit extension to Micro and Small Enterprises through their firm capital sufficiency besides liquidity ratios that position the banks in a better position for lending the Micro and Small Enterprises without eroding respective balance sheet qualities.
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