The past two years have seen the exits of Standard Chartered, HSBC, Lloyds Bank and RBS from the small to medium enterprise sector in the United Arab Emirates. The exodus creates a unique opportunity for alternative lenders to cater to the small-to mid-size market. The exit of larger commercial lenders coincides with a recent report from the Dubai Economic Council (DEC) and Deloitte, which found that strengthening SMEs will be a major driver for the future of Dubai as a global financial and trading hub.
The exact motive for the exodus is unclear. In late 2014, Standard Chartered was in talks to sell $400 million of its SME loans, amounting to 80 percent of its stake in the region, Bloomberg reported. HSBC pulled out in 2013, upsetting borrowers by terminating small business accounts with little warning. U.S. regulators have hit both banks hard over lapses in compliance and anti-money laundering controls, reducing exposure to seemingly higher-risk small businesses could be a means to compensate.
Writing for The National, investor and former banker Sabah Al Bibali stated that while the departure of the major banks does leave the SME market in the UAE underserved, it also creates a more available landscape for alternative funding methods including crowdfunding, specialist banks and perhaps peer-to-peer lending (P2P lenders like Lending Club have already raised global interest for SMB lending). Each has advantages and drawbacks. Specialist banks, though smaller than commercial banks, are highly regulated and generally have the infrastructure to for small-business lending at low rates. Non-bank and peer-to-peer lenders can be more flexible than banks and are faced with fewer regulations, which can increase the cost of borrowing. Al Bibali notes while none of these methods has been tested, non-bank options may appeal to business owners “disillusioned with the banking system.”
UAE-based Rakbank is taking advantage of the exit of traditional multinational lenders. More than a decade ago, the bank shifted its focus from corporate banking to retail and small businesses. The move paid off. Chief Executive Officer Peter England told Middle East newspaper The National he expects the bank’s loan book to grow by 15 percent in 2015, nearly twice the growth rate of the sector overall. “We’re very much a UAE-focused bank,” England said. “For us it’s about trying to get a bigger piece of the pie in the UAE.”
Experts agree: a focus on supporting SMEs is important if the UAE wants to compete with innovation-driven economies like that of Hong Kong and Singapore and maintain dominance over other regional rivals such as Qatar and Saudi Arabia. The DEC/Deloitte report cites supporting the creation of SMEs as a main driver of differentiating UAE by attracting investment and promoting innovation. With an eye toward banking, the report recommends “raising awareness amongst the banking community of SME financing requirements and the need for the introduction of more customized financing products could improve access to finance as well as help banks diversify their loan books.”
The government is also supporting the growth of SMEs. Last spring, President Sheikh Khalifa approved a measure that would mandate federal authorities and ministries contract at least 10 percent of their budget procurement to small to medium business. This is in line with the nation’s desire to increase the parentage of non-oil related GDP by 10 percent by 2020. While there has been more support for small businesses, there is a lot of room to grow. Currently, SMEs represent 92 percent of registered companies, but only represent 3 percent of total loans. Bankers in the region cite reasons ranging from lack of regulation to the relative youth of the SME sector in the UAE.