My comments at MEED special report on the role of UAE banks to foster SME sector development

1. 17/02/2015 09:33SMEs await boost from new UAE legislation | Special Report | MEED
Page 1 of 4http://www.meed.com/sectors/economy/government/smes-await-boost-from-new-uae-legislation/3206338.article
SMEs await boost from new UAE legislation
10 February 2015 8:55 GMT | By James Gavin
The UAE’s small and medium-sized enterprises are an important contributor to economic growth, and new
legislation aims to foster local initiatives
When it comes to economic growth, official UAE policy now is to think small: specifically, to boost the small
and medium-sized enterprise (SME) sector as the main engine of the economy.
Concrete measures are being taken at the federal level to give a concerted push to the all-important SME
sector.
In April last year, the federal government approved a landmark law, Federal Law 2 of 2014, that aims to
support UAE SMEs by setting up a dedicated council and granting them exemptions from various taxes.
Crucially, the legislation also forces state procurement entities to allocate at least 10 per cent of their
contracts to Emirati-owned SMEs.
Key fact
In the UAE, SMEs account for 92 per cent of all registered firms and 86 per cent of the workforce
Source: MEED

2. 17/02/2015 09:33SMEs await boost from new UAE legislation | Special Report | MEED
Page 2 of 4http://www.meed.com/sectors/economy/government/smes-await-boost-from-new-uae-legislation/3206338.article
The law – which is not yet on the statute book because bylaws have not yet been approved – requires federal
government entities to allocate a minimum 10 per cent of their purchasing, servicing and consulting budgets
to SMEs.
In addition, start-up and running costs for SMEs will be reduced, and the firms will enjoy improved access to
finance from the state-owned Emirates Development Bank.
Local content
This is not just about boosting SMEs as a whole; instead, the legislative thrust is explicitly about boosting local
content.
Unveiling the legislation, Economy Minister Sultan bin Saeed al-Mansouri said it was in line with the vision of
the leadership to create “an appropriate business environment for UAE nationals to increase their presence in
the business sector and enhance their role in supporting the sustainable development of the country”.
The measures go beyond forcing government agencies to procure 10 per cent of their contracts from local
SMEs; any entity more than 25 per cent owned by the federal government will be required to award at least
5 per cent of its contracts to local SMEs.
Dubai SMEs by sector
Sector % of SMEs % of SME GDP % of SME workforce
Trading 57 47 51
Services 35 41 33
Manufacturing 8 12 16
Source: Emirates NBD
Dubai SMEs, tend to be export-oriented, with more than half having a significant proportion of their revenues
generated outside the UAE, according to research from Emirates NBD Bank.
There is additional support granted to the UAE’s export-oriented small firms.
Any products made by local SMEs should be exempt from customs tax for equipment, raw materials and
intermediate goods for manufacturing purposes. The Small & Medium Enterprises Council is to coordinate with
the Labour Ministry over implementation of the regulations.
Underlying this is the realisation that most jobs in the country are created in the SME sector. Emirates NBD
says in the UAE as a whole, SMEs account for 92 per cent of all registered firms, and employ 86 per cent of
the workforce. SMEs also contribute about 60 per cent of the UAE’s non-oil GDP.
UAE SMEs are particularly keen to gain better access to financing under the new regime. According to Bassel
Nadim, managing director of Tanmia Capital in London, and a former CEO of the Accountants and Auditors
Association in the UAE, Law 2/2014 is welcome, but there is now a strong need for banks in the country to
facilitate the work of SMEs.
Accessing finance
“There’s still a bit of reluctance among banks to open company accounts, sometimes because the size of the
account isn’t big enough to justify it,” says Nadim. “There’s a need for a cultural change among lenders
concerning the financial inclusion proposition when it comes to dealing with SMEs.”
This underlines the considerable financial obstacles in the path of local SMEs. Banks need collateral to lend
against, but SMEs tend to lack assets. As a report issued last year by the Dubai Economic Council
notes, early-stage SMEs seldom get any bank lending.

3. 17/02/2015 09:33SMEs await boost from new UAE legislation | Special Report | MEED
Page 3 of 4http://www.meed.com/sectors/economy/government/smes-await-boost-from-new-uae-legislation/3206338.article
“The lack of access to finance and markets has held UAE SMEs back,” says Nadim. “The local economy is
liberal and businesses are open to each other. But with less economic activity regionally than there was
before, the market is a bit narrow for small businesses.”
Legislative impact
That the legislation envisages Emirates Development Bank establishing new SME-focused financing methods
is, therefore, particularly welcome. The state-owned lender will be obliged to ensure that at least 10 per cent
of its annual financing is allocated to SMEs. The UAE Central Bank is also expected to issue further regulations
to support SME financing.
Further government measures may be needed if the SME push is to have the full desired impact
The federal legislation takes its lead from the existing support provided to Dubai SMEs through the emirate’s
Government Procurement Programme.
Under the scheme, government and semi-government entities (where the Dubai government owns more than
50 per cent) are required to allocate at least 5 per cent of their annual purchasing budget to programme
participants.
But the federal nature of the SME law should endow it with much greater impact on the overall sector, at least
once the bylaws are in place and the procurement system is up and running.
Awaiting approval
Much is expected of the reforms. “This is a milestone for the UAE economy. The new SME council will
synchronise policies for the SME sector, under the supervision of the Ministry of Economy,” says Nadim. “It’s
the right paving stone for SMEs to really develop their capabilities.”
But with the bylaws still awaiting approval, much of the detail of the legislation remains to be defined. For
example, it is unclear what actually constitutes an SME under this new regime. Section 3 of the SME Law
states that the SME Council will determine which firms qualify based on factors such as number of employees,
turnover, capital investment, and any other criteria, given the nature of activities undertaken.
There is no detail, however, as to what those numbers are. That suggests a certain amount of opaqueness in
the process.
In Dubai, at least, there are clear definitions based on sector and number of employees, which may give some
indication as to how the federal SME Council will determine the classifications.
In terms of the promotion of local SMEs, the law provides that only 100-per cent Emirati-owned SMEs will be
eligible for the benefits. That will be appreciated by the Emirati private sector, but this segment is still minute
in the grand scheme of things. It is estimated that fully UAE-owned companies only account for 9,000 of the
300,000 UAE-registered SMEs.
Further measures
The new perks may well encourage more Emiratis to set up their own firms, but it will clearly take much more
time before they will make up a significant proportion of the broader SME sector across the seven emirates.
And that means the economic growth boost the changes are intended to deliver may take far longer to
materialise.
Further government measures might be needed if the SME push is to have the full desired impact. The Dubai
Economic Council report issued last August called for an easing of restrictions on collateral, so that a broader
range of funding sources can be made available to SMEs, including from private individuals.
It advocates the creation of a central SME registry, in which their assets would be listed when they are
seeking commercial financing, noting that the lack of an adequate security regime is a major reason for the

4. 17/02/2015 09:33SMEs await boost from new UAE legislation | Special Report | MEED
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low level of bank lending to SMEs.
In addition, it argues for the setting up of a court with exclusive authority in the event of any legal fallout
arising from an SME defaulting on its loan. That would go some way to winning banks’ buy-in.
UAE SMEs have in the past proved problematic to deal with for some of the largest international lenders.
Last year, the UK’s Standard Chartered was forced to sell part of its UAE business after choosing to end high-
risk relationships with SMEs. Many saw the bank to have been damaged by money laundering activities
carried out by some of its smaller UAE clients. Standard Chartered said it would, nonetheless, still retain a
limited number of larger SME accounts in the UAE, which provided higher revenues and low risk of violating
money-laundering rules.
The new legislation will take time to bed in, and much of the groundwork still needs to be done. But it is a
positive starting point for local entrepreneurs. State entities should take note.
“For government entities and state-owned enterprises, it should be part of their [key performance indicators]
now to deal fairly with SMEs. And the banks should follow suit,” says Nadim.
Enter MEED’s Gulf Capital SME Awards
The Gulf Capital SME Awards programme recognises success, growth and innovation in business. It provides
a platform for UAE SMEs to raise their profile, brands, products and services.
The awards recognise impressive performance in areas including innovation, customer service and
sustainability practices. Enter your business to win.
Entries open 16 February
www.meedsmeawards.com
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