Tag Archives: Credit

Stark SME stats don’t tell the full story

November 27, 2017 By in SME Tags: , ,

The issue of lending to SMEs in the UAE was discussed at the Middle East Banking Forum in Abu Dhabi on Wednesday, where a number of solutions were raised to tackle a perceived dearth in funding for the country’s small businesses.

Mubarak Rashed Al Mansoori, the governor of the Central Bank of the UAE, said the Bank was working on a multi-pronged solution to the conundrum, one of which is to encourage private equity (PE) investors to take up some of the slack left by the banks.

Important as it is for PE players to participate in the SME sector, it’s worth remembering that their contribution forms a different part of the capital structure for businesses of all sizes. There’s undoubtedly a place for equity investment in SMEs, but that doesn’t mean they won’t need debt as well.

That’s not to say that the Central Bank is looking for solutions in the wrong place. But it’s worth noting that the bank has already done everything in its power to support the SME segment. The banking sector and the SMEs themselves, however, deserve a little more scrutiny. Continue reading →

The Characteristics of an Alternative Lender

February 24, 2015 By in Credit Tags: ,

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In a recent article, this column laid out the case for the rise of the alternative lender as a natural consequence to the hole left by conventional banks withdrawing from the SME market. This article looks at what a successful alternative lender might look like.

The first step is to understand the relevant characteristics of a conventional SME lender. Conventional banks are, by and large, mature companies with an inflexible and conforming operating culture. This leads to risk rigidity, i.e. banks will usually get comfortable at one point of the risk curve and they will rarely leave it.

This in turn leads to product concentration and possibly myopia at the macro level with innovation only at the micro level. What this means is that the basic types of products do not change, so a salary loan will pretty much be the same at all the banks in terms of tenor and structure. One bank might add a lottery to the loan, another bank might allow deferral of one payment per year, but overall they are the same.

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The Rise of the Alternative Lender

January 20, 2015 By in Credit Tags: , ,

Standard Chartered, HSBC, Lloyds and RBS have all withdrawn from the SME sector in the UAE. Is this an indication of problems in the UAE SME sector? Absolutely not. It is an indication of troubled global banks and a flawed banking strategy.

Understanding the issue, and the opportunities that it presents, requires an understanding of the common attributes of these four banks and their failures. The starting point is that all of these banks are known as strong commercial banks catering exclusively to retail and corporate clients for most of their 150 to 270 year history.

Then along came Wall Street, its investment banks and fat deal fees. Mortgage backed securities, collateralised loan obligations, foreign exchange futures, interest rate derivatives. Fast talking MBAs backed by deep thinking PhDs. Black Scholes equations, Ito’s lemma, Gaussian copula functions and stochastic calculus. Easy as taking candy from a baby. What could go wrong?

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SME financing needs from management's perspective

December 16, 2014 By in SME Tags: ,

Small and medium enterprises (SMEs) have been getting a lot of attention in the past few years. Government initiatives such as the Khalifa Fund and Dubai SME 100 complement private initiatives seeking to provide financing for these SMEs. Everyone agrees that SMEs form an important part of the economy. Everyone also agrees that supporting SMEs is challenging. That is the sum total of what people agree on with regard to SMEs.

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Lack of SME Lending Harms Large Corporates, Creates Shadow Banking

November 20, 2014 By in SME Tags: , , ,

The existence of an SME credit gap, the difference between demand for loans by SMEs and provision of those loans by commercial banks, and its effects on SMEs has been discussed in detail in a separate article on this blog. The effects on large corporates is no less serious. Using some simple statistics from the earlier article, if SMEs are the source of greater than 50% of GDP and their share of bank lending is only 4% then either SMEs are super efficient, big corporates are super inefficient, or somebody else is financing these SMEs. I think that we can safely agree that it is highly unlikely for the SME sector to be super efficient or big corporates to be super inefficient. That leaves some, or all, of the USD 260 billion SME credit gap funded by a segment of the economy other than banks. Let’s unravel this mystery.

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Why SMEs are Survivors

November 5, 2014 By in SME Tags: ,

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SMEs are a family’s lifeblood. They are built and run by families. They are not conglomerates with diversified business lines, they do not own monopoly agencies guaranteeing income, they do not have special connections to large clients securing lucrative contracts. SMEs are run by the blood, sweat and tears of the family members. If the SME fails then loved ones will go hungry. That is exactly why SMEs are survivors.

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SMEs: The Ignored Middle Child of Banking?

October 23, 2014 By in SME Tags: , , ,

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In developing various business plans for SME credit I often review why the commercial banks do not lend to this sector proportional to its contribution to GDP. I have written at length about some of my main ideas but I think there are several secondary issues that also play a role. One is the positioning of SME loans on the risk/reward curve relative to the two main alternatives: corporate loans and retail loans.

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The SME Credit Gap in the Middle East

October 14, 2014 By in Credit, SME Tags: ,

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According to the IFC SMEs in the UAE represent 90% of total businesses. As a total percentage of GDP the estimates for rich MENA countries is estimated at approximately 51% contribution from SMEs with employment contribution at 62%. Paradoxically there is a SME credit gap in excess of USD 260 billion in MENA with only 4% of outstanding loans in the UAE awarded to SMEs. This points directly to the main challenge facing SME sector growth.

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