UAE SME BANKING
The SME market in the UAE comprises over 230,000 entities with a total revenue pool of over $1.2 billion By Mayank Kant Upadhyaya
Looking back at the world of business and financial services at the turn of the millennium, the definition as well as the strategic position in the economy of Small & Medium Enterprises (SMEs) was considered, at best, fuzzy. The world of business has however undergone a metamorphosis over the last 10-15 years and the cascading impact has been witnessed in the arena of SME businesses and SME banking.
In many ways the coming into its own of the ‘SME’ segment is akin to the emergence of the ‘Middle Class’, the significant consequence of the Industrial Revolution of the 18th century – the similarities range from the ‘brand-name’, the definition, the growth rate relative to the economy, the intermediation factor between the haves & the have-nots, the recognition of the existence and importance of the segment along with its specific characteristics and needs, and most importantly the impact on the broader socio-economic canvas.
SMEs have always continued to exist and grow as an integral part of the economies; however, the focus on SME business and banking growth is a consequence of a rapid evolution over the last two decades in the way business is conducted across industrial segment, trading segment, services sector and banking, as a financial service, has tended to keep pace with these.
By definition, the developed economies were the first to witness the SME revolution, and over the last 5-7 years most emerging economies have reflected phenomenal evolution in the SME growth rates accompanied by never-before banking, specifically SME banking, growth rates.
The Middle East, specifically UAE, has been witnessing hectic non-oil economic activity for the last 3-4 years led by 3 sectors – real estate, trading, and retailing. Accordingly, the UAE has come to be acknowledged as a model growth economy with business-friendly policies in the form of positive economic guidelines (e.g free zone proliferation), low entry barriers, robust infrastructure, skilled manpower, favorable financial framework.
SME Market
The SME market in the UAE comprises over 230,000 entities involved in wholesale trading, retailing, manufacturing/ processing and services with a total revenue pool of over $1.2 billion and growing at an annual rate of up to 25 per cent. Wholesale trading and retailing are by far the largest segments in turnover/ revenue pool terms for SMEs. (Exhibit 1).
These have been largely boosted by the following factors:
- Fundamental monetary and economic solidity lent by historically significant oil-reserves
- Strategic geographical advantage of the UAE for international trade
- Vision, Planning and Execution capabilities of the country’s top leadership
- Positive regulatory guidelines
- Favourable economic and monetary policies viz. NIL taxation, relative ease of money flow, capital account convertibility etc
- Infrastructure development in the form of ports, roads, airports, rail, telecom, other utilities
- Constructive real estate initiatives and & the resultant sectoral boom
- Low entry and exit barriers for businesses
- Skilled expatriate workforce from multifarious ethnic and geo-political backgrounds across diverse sectors
- Significant broad-based international investment in the region
- Heightened consumerism (demand as well as supply) as a consequence of the above directly boosting the retail sector
Over the last decade, the UAE has been taken concerted steps towards attracting expatriate businesses and businessmen to set up new operations or divert existing ones to the UAE. A key initiative has been establishing of numerous Free Zone and Sector-specific special economic zones.
An SME entity within UAE can be set up as a trading (including retail trade), manufacturing (including processing) or services enterprise, in one of the following manners:
- Limited Local Company (LLC)
- Partnership
- Sole Proprietorship
- Free Zone Company (FZC)
- Free Zone Establishment (FZE)
- Joint Venture Entity
- Offshore/ Non-Resident Entity set up in Free Zone
- Offshore/ Non-Resident Entity not set up in Free Zone
- Offshore Entity set up in Free Zone with Trade License
- Professional Entity
- Service-rendering Entity
Besides boosting expatriate investment through set up and growth of SME businesses, the UAE government has taken conscious concrete steps (such as UAE Entrepreneurship Forum) to support growth of SME businesses fully owned, run and managed by UAE nationals across diverse sectors.
Documentation for opening an account too varies depending on the constitution of the business entity.
SME Fundamentals & Emerging Trends
The recognition of SME characteristics and needs, and the diverse ways to fulfill their business banking requirements have come of age in recent times.
Key fundamental concepts and emerging trends that banks are typically keeping in mind whilst soliciting and managing SME portfolio/ relationships are:
- SME segment is one of the fastest growing segments in the market and is rapidly gaining dominance in the overall macro-economic environment as well as for the banking sector.
- Housing SME banking unit within Corporate/ Wholesale Banking, Retail/ Consumer Banking or as a separate Vertical of its own – all three organizational options have adequate empirical evidence of success across varying banking organizations/ situations as long as the business gets sufficient senior management focus and the full product suite is offered in concerted manner under a single umbrella.
- Leveraging scalable distribution channels viz. Direct Sales, Branches is important for SME success.
- Customer needs and management approach are different for Small and Medium Business.
- Segmentation is the key to building differentiated approaches.
- Differentiation through positioning and packaging creates USPs.
- Many SMEs do not require lending as a key product.
- SME asset portfolios offer a better Risk-Reward structure than Corporate portfolios.
- Personal and business wealth are integrally linked and so are the key needs.
- Developing Standardisation and Building Scalability are key to success of SME business.
- Efficiency in Sales, Distribution and Service Models is key to achieving scale and market share.
SME Banking Strategic Steps
The UAE market has seen origination and rapid growth of SME Banking divisions across local as well as multinational banks alike over the last 5 years. Banks need to typically follow the following set up schematic to ensure success of their SME banking business.
- Market – Define SME Market Space
- Internal Environment – Create suitable Internal Structures
- Initial Segments – Segment the Market for Identifying Opportunities
- People – Hire the Right People with Skill-sets
- Segment Analysis & Segmentation – Define Need Sets across Segments
- Products – Develop Products & Value Propositions
- Credit – Develop specialized SME Credit Infrastructure
- Channels – Establish Efficient and Effective Sales & Distribution set-up
- Service & Service Delivery – Develop Robust & Scalable Delivery infrastructure
- Processes & Controls – Portfolio Monitoring, Transaction Monitoring, Operational Risk Mitigants
- Business Momentum – Achieve Critical Business Mass
- MIS Development – MIS at Different Levels
- Differentiate – Value-added Propositions for Top-end & Standardise for Mass Market
- Deepening, Broadening and Refining…an ongoing process
Typical banking products offered to the SMEs and the channels through which these products and services are delivered (Exhibit 2).
Banks adopt different delivery models and these models also vary based on the segmentation and differentiation strategy and the systems and processes adopted by the banks. Seamless delivery to minimize service issues and maximise convenience are critical.
Most SME banking models have been a result of evolution over a period of time (late entrants have of course adopted the market best practices straight away to shorten the learning curve) and typically follow the Value Chain model laid out at Exhibit 6, in terms of commencing as a New Business and/or New-to-Bank (NTB) relationship.
More evolved and multi-banked SMEs or SMEs with credit facility needs can be solicited by banks as NTB relationships at higher levels within the value chain.
Several SMEs, however, remain non-borrowing entities, based on their self-financing trading cycle and yield valuable liabilities, fee, trade services, treasury and investment business to the Banks without ever availing funded or non-funded facilities.
There are others which may commence relationships with a mortgage product viz. commercial mortgage, commercial vehicle finance etc i.e. asset backed financing.
Other forms of asset backed financing like receivables financing, factoring, equipment financing, lease financing etc, however, are typically not offered upfront and Banks usually await a stable track record of the entity and sound underlying financials to gain comfort before considering such financing.
Success of an SME banking business can be gauged by parameters like total active customer portfolio (borrowing and non-borrowing transaction relationships), self-financing nature of the business (liabilities book to ideally significantly exceed the asset book – this also reflects overall SME market reality), the average product holding per relationship (thus demonstrating customer satisfaction, loyalty, growth potential and revenue per relationship), and last but not the least robust portfolio/ transaction monitoring and control mechanisms to minimize all risks including credit-related risks, operational risks and compliance risks (a booming, dynamic and free market always gathers potential for downturns and slowdowns, bad/ suspicious money and broadly speaking unscrupulous elements). Solidity on these parameters means the business is in a profitable, predictable and sustainable state.
Needless to state, to reach this state, the quality of the foundations and building blocks and adoption of the right business model (which may of course vary across organizations depending on synergies with internal priorities) is key.
Mayank Kant Upadhyaya is Vice President-Products, Business Development & Strategy, SME Business, Retail Banking Group, Mashreq