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Current scenario of micro and small enterprises in the Kingdom of Saudi Arabia

Discuss about the Strategies for Small and Medium Enterprises.

The Kingdom of Saudi Arabia’s banking sector enjoys a substantial potential growth opportunity regarding micro and small enterprises. The economy of KSA contributes over 90 percent of all the registered enterprises besides sixty percent of the total employment. These figures are drawn from the latest report released by the Aljazira Capital. The report indicates that micro and small enterprises occupy a strategic and central place or position in the development strategy of the Kingdom of Saudi Arabia (Saddi & Soueid, 2011).

The KSA’s economy currently undergoes lower prices of oil. Accordingly, the significance of the contribution of the micro and small enterprises to GDP has is becoming clearer. The best approach to undertaking this is through boosting the micro and small enterprises sector in the Kingdom of Saudi Arabia (Stone & Badawy, 2011).

There is, therefore, a substantial potential that micro and small enterprises give to the banking sector in Saudi Arabia. The prospects for the growing credit extension to micro and small enterprises sector remains a significant aspect of the economy (Dakkak, 2011). This would the first glance seems to be good (Dakkak, 2011).

In contrast to the context in several advanced economies whereby the banks are shifting from over-leveraged positions, the Kingdom of Saudi Arabia’s lending institutions enjoy a firm capital sufficiency (Zamberi Ahmad, 2011). These institutions also enjoy liquidity ratios that theoretically position them in the best position for lending crossways the whole spectrum of the micro and small enterprises sector without the erosion of the respective balance sheet qualities.

Nonetheless, despite the auspicious essential aspect of the micro and small enterprises proportion, the lending to this sector stays obstinately subdued. Whereas the formulation of the micro and small enterprises lending map for the MENA area is complexed by the fluctuating definitions as well as reporting standards, the “Flagship Report 2011”by the Union of the Arab Banks alongside World Bank discovered that just two percent of the Kingdom of Saudi Arabia’s entire lending was directed to micro and small enterprises sector in 2011 (Yousuf Danish & Lawton Smith, 2012).

Despite the above figure being relatives low, it might always be the anticipation in the small, corporate-predominated economies like Qatar whereby the micro and small enterprises contributes merely ten percent of the aggregate loan book. However, this is a surprising result for the KSA that has toured further down the road of the diversification of the economy compared to some of its hydrocarbon-rich neighborhoods (Yousuf Danish & Lawton Smith, 2012).

Challenges faced in micro and small enterprises funding


Even though the lending volumes stay modest crossways most of the MENA area, based on the report, with even vast economies including Egypt manifesting low degrees (at merely five percent ), economies like Tunisia (fifteen percent), Morocco (twenty-four percent) and Lebanon (sixteen percent) indicate the potential for micro and small enterprises sector lending in this region of the globe.

Nevertheless, salient hurdles have been identified to account for such low levels despite the potentiality of the micro and small enterprises sector to the banking sector. These challenges must be addressed and negotiated by the banks before any probability of a substantial uptick in micro and small enterprises lending (Yousuf Danish & Lawton Smith, 2012). The small enterprises have been defined by the Central Department of Statistics and Information (CDSI) as those firms with between five and nineteen workers and with an annual turnover of between 1.3 million dollars and 6.7 million dollars. Firms that have more than twenty workers alongside a turnover of between 6.7 million dollars and 33.3 million dollars are regarded by the CDSI as medium-sized businesses.

A great proportion of the financial infrastructure that underpins lending to micro and small enterprises is a comparative novice and barely just emerging from a time of insufficiency.  Hence banks with customized micro and small enterprises management skills remain scarce sometimes and shall, therefore, continue presenting a human resource challenge in the short-run (Al Saleh, 2012).

This challenge is further reflected within the micro and small enterprises sector themselves whereby the management of cash alongside skills in accounting frequently fall short of the needs of the banks that assess them as potential customers (Al Saleh, 2012). The financial transparency, however, improving, remains a major concern, and the absence of collateral within the micro and small enterprises sector remains a major threat to the slow loan book growth.

Together, these factors are essential in giving a detailed explanation to the micro and small enterprises funding disparity which has stayed a characteristic of the KSA’s banking landscape for years (Al Saleh, 2012). For a quite a good number of lending institutions, there has been historically little incentives for capital investment as well as manpower in the search of the comparatively modest returns provided by the micro and small enterprises facilities where large-tickets transactions or deals with companies have offered easy as well as consistent revenue (Yousuf Danish & Lawton Smith, 2012).

The Kingdom of Saudi Arabia’s banks hence has embraced a conservative position or stance to micro and small enterprises lending. Whereas it remains a usual practice for lenders who finance big contractors to assess their sub-contractors automatically as potential customers, in cases where such a connection is absence, make these banks to be reluctant or hesitant in credit extension.

The Kafalah Scheme for enhancing lending to micro and small enterprises

The significant of the micro and small enterprises’ roles remains a strategic imperative in developing the KSA’s economy thereby making the challenge in their financing a nationwide concern. The micro and small enterprises Loan Guarantee Programme has subsequently become the principal mechanisms by which the KSA’s government seeks to enhance the lending to the micro and small enterprises.

What this means of funding is commonly regarded as the Kafalah programme established by the Ministry of Finance back in 2006 in collaboration with the domestic banks specifically to allow micro and small enterprises to enhance their efficiency as well as enlarge their respective operations. It has also increased the number of micro and small enterprises and allowed them to absorb the surplus liquidity of the banking sector. It has also been channeled to micro and small enterprises sector as well as familiarize micro and small enterprises owners with the process of baking alongside advantages of banking. It has also increased the participation of the micro and small enterprises as well as provided new employment opportunities to the people of KSA through the increased number of the micro and small enterprises.

The Kafalah scheme’s operation has remained encouraging regarding its performance. For example, by the 3rd quarter of 2014, it had guaranteed a loan of 10,118, for a sum value of SR4.9 billion (1.3 billion dollars). This scheme has a had a consistent growth year-on-year where it began by helping thirty-six enterprises in the year 2006, and by 2013, the scheme was helping over 1000 micro and small enterprises on a yearly basis (Al Saleh, 2012).

The scheme has also managed to secure the cooperation of the banking sector. Of the twelve domestically registered lending institutions, ten have made use of this guarantee in their respective extension of credit to micro and small enterprises, with National Commercial Bank, Arab National Bank, Riyad Bank, Arab National Bank as well as Al Rajhi Bank contributing to over eighty percent of the whole (Al Saleh, 2012). 

There is a further positive sentiment attached to this scheme. The Kafalah scheme has precisely played an essential role in providing the credit to the micro and small enterprises sector. However, in the run-run, it will be more desirable to have a more proactive approach by banks to give the best solution to the above-identified funding disparity. However, clear indications including an alteration in the attitude is taking shape (Al Saleh, 2012).

Positive sentiment and proactive approach towards micro and small enterprises credit


The micro and small enterprises scheme’ success has permitted banks to enlarge their exposure to what is viewed as an increasingly attractive sector by the industry. Moreover, the increasing competition in the banking sector alongside the changed economic backdrop which is prevalence in the wake of the global economic crises have both acted to shift sentiment circumventing micro and small enterprises credit into more positive territory.   

The entire KSA’s lenders currently uphold committed and dedicated micro and small enterprises departments even though their respective strategic approach has differed. For example, Saudi Hollandi, have created micro and small enterprises units as a component of their respective retail operations (Nasr & Rostom, 2013).

Whereas some have decided to position them within their corporate divisions. Nevertheless, crossways the banking industry, a common recognition of the days of downscaling corporate instruments as well as applying them to micro and small enterprises lending or extending retail-oriented commodities into micro and small enterprises sector, are outdated exist.

KSA’s banks have started the deployment of micro and small enterprises-specific commodities, and whereas extending credit to the micro and small enterprises sector, stays problematic, certain segments with the capability of being financed via cash-flow basis like suppliers that serve contractors on enormous projects, have proved helpful.  

Significantly, banks are further beginning to go beyond the Kafalah scheme to undertake this business. The banking sector is currently in the midst of enlarging their micro and small enterprises operations (Nasr & Rostom, 2013). For the big micro and small enterprises financial model lending has remained fine, however, the banking industry has established a scorecard system that is used in their ten micro and small enterprises units nationally.

Banks currently examine the micro and small enterprises banks statements behavior, business, the duration in the region as well as commodity offered to lend totally on a standalone basis from Kafalah, even though banks still give support to the Kafalah Scheme (Nasr & Rostom, 2013).

The above hand-on strategy employed by the KSA’s banking sector has allowed banks to extend credit in hitherto underserved regions. This move denotes a substantial step forward from where the Kafalah guarantees were the chief factor in the process (Dakkak, 2011). The Banque Saudi Fransi created its micro and small enterprises until late 2013 and had observed a double-digit growth with regards to its lending to micro and small enterprises sector due to its more forensic strategy to evaluate risks particularly by character (Nasr & Rostom, 2013).

Strategic approach of banks towards micro and small enterprises

Going forward, in the presence of a modest micro and small enterprises lending level which the banking sector is presently exhibiting, a clear considerable distance to travel before the KSA economy’s smaller enterprises might be said to be effectively served (Dakkak, 2011). The start-ups, as well as firms that have rudimentary accounting procedures, stay locked out of the market despite the fact that the nascent private equity sector is starting to show interest in the former (Nasr & Rostom, 2013).

A concern that sustained depreciation of the prices of oil shall have an impact on the payment of the government to contractors over the future years may reduce the inclination of banks to lending past their comfort zone of chief contractors as well as well-established suppliers (Otsuki, 2012). Nevertheless, the green shoots of a micro and small enterprise lending platform are precisely visible, as well as banks have commenced showing their interest in the sector by developing the micro and small enterprises infrastructure alongside skills (Dakkak, 2011). 

The KSA’s micro and small enterprises contribute about 33% to the Gross Domestic Product. The micro and small enterprises comprise approximately 25% of the workforce. The bigger proportion of the micro and small enterprises labor force in KSA comprises of migrant laborers (Nasr & Rostom, 2013). In the year 2010, the root problem facing the micro and small enterprises besides the KSA’s economy at large were rightfully attributed to the immensity of the oil as well as the public sectors that are the chief drivers for the economic operations (Nasr & Rostom, 2013).

The global contribution of the micro and small enterprises is a disproportionately enormous share of the novice job opportunities, specifically in such economies that have shown a firm employment record (Nasr & Pearce, 2012). The micro and small enterprises labor intensity have been shown by the World Banks papers to be four to five times higher for the small enterprises (Nasr & Rostom, 2013). The 9th five-year plan of the KSA has missed again its most essential target:  a reduction in unemployment thereby rendering the economic planning an unproductive operation. As reflected in the recent plan, the unemployment would be declined from 10.5% in 2010 to 5% by 2013 whereas the unemployment as per the 2013 survey stood at 11.7% (Loayza & Wada, 2010).

The support for micro and small business is needed to assist in restructuring the big enterprises. This will be done by streamlining manufacturing complications. The micro and small business will be able to curb the monopoly of big enterprises and provide them complementary services besides absorbing the altering modern economy (Gopinath & Upadhyay, 2012). The micro and small business will also generate significant gains by establishing a skilled industrial base as well as industries alongside developing a well-prepared service segment capable of contributing to the Gross Domestic Product via value-addition framework (Nasr & Rostom, 2013).

Expansion of micro and small enterprises in banking sector

The KSA-wide mechanism or strategy for micro and small business is required based on one institution responsible as well as accountable to be in place (Nasr & Rostom, 2013). The KSA’s government should commence this with a single definition for what comprises micro and small business than the current four different definitions that are quite confusing. Moreover, about seven institutions are engaged in micro and small business financing besides the banks that run without any coordination (Dakkak, 2011).

The lack of efficient as well as effective supervisory agency accounts for the worsening the challenge as closely seventy-four percent of micro and small business falling within the segments of trade besides construction. Such sectors have reduced value-addition rates as well as establish few opportunities for jobs in KSA (Crals & Vereeck, 2015).


Another major challenge that affects micro and small business is access to financing. In KSA, lending to micro and small business as a proportion of the entire loans pegs at 3% whereas in other emerging economies it is on average near to twenty percent as well as in advanced economies beyond twenty-five percent (Asad Sadi & Henderson, 2011). The micro and small enterprises face lengthy bureaucratic processes and procedures besides licensing which is a huge challenge for micro and small enterprises.

There is a need to alter the cycle of the labor market by shifting it away from its reliance on the low-paid expatriate labor force (Dakkak, 2011). The KSA government should educate the prospective micro and small enterprises owners via the Small Business Bureau on such areas as basic accounting, marketing, management as well as financial planning skills (Al Saleh, 2012). The KSA government also needs to mandate that twenty percent of its contracts go to the micro and small enterprises (Dakkak, 2011). The Supreme Economic Council of KSA should re-configure the micro and small enterprises sector.

References

Al Saleh, A. (2012). Exploring Strategies for Small and Medium Enterprises in Saudi Arabia. In RIBM Doctoral Symposium on “Strategies for SMEs in Saudi Arabia”, 14th-15th March.

Asad Sadi, M., & Henderson, J. C. (2011). Franchising and small medium-sized enterprises (SMEs) in industrializing economies: A Saudi Arabian perspective. Journal of Management Development, 30(4), 402-412.

Crals, E., & Vereeck, L. (2015). The affordability of sustainable entrepreneurship certification for SMEs. The International Journal of Sustainable Development & World Ecology, 12(2), 173-183.

Dakkak, N. (2011). Obstacles towards curriculum reform in the Middle East: Using Jordan and the UAE as case studies. Policy brief, Dubai School of Government.

Gopinath, M., & Upadhyay, M. P. (2012). Human capital, technology, and specialization: a comparison of developed and developing countries. Journal of Economics, 75(2), 161-179.

Loayza, N., & Wada, T. (2010). Informal Labor in the Middle East and North Africa: Basic Measures and Determinants. Washington, DC: World Bank.

Nasr, S., & Pearce, D. (2012). SMES for job creation in the Arab world: SME access to financial services. Washington DC: World Bank.

Nasr, S., & Rostom, A. M. (2013). SME contributions to employment, job creation, and growth in the Arab world. Job Creation, and Growth in the Arab World (October 1, 2013).

Otsuki, M. (2012). SMEs supporting systems in Saudi Arabia. speech, October, 15.

Saddi, J., & Soueid, R. (2011). Accelerating entrepreneurship in the Arab world. In The Forum of Young Global Leaders, World Economic Forum, and Booz & Company. Retrieved from https://www3. weforum. org/docs/WEF_YGL_AcceleratingEntrepreneurshipArabWorld_Report_.

Stone, A., & Badawy, L. T. (2011). SME INNOVATORS AND GAZELLES IN MENA?EDUCATE, TRAIN, CERTIFY, COMPETE!. Small, 5, 19.

Yousuf Danish, A., & Lawton Smith, H. (2012). Female entrepreneurship in Saudi Arabia: opportunities and challenges. International journal of gender and entrepreneurship, 4(3), 216-235.

Zamberi Ahmad, S. (2011). Evidence of the characteristics of women entrepreneurs in the Kingdom of Saudi Arabia: An empirical investigation. International Journal of Gender and Entrepreneurship, 3(2), 123-143.

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