Survey of Financing Options and Key Challenges Faced by SMEs in the UAE: Economic Environment, Finance, and Regulatory Landscape

Survey of Financing Options and Key Challenges Faced by SMEs in the UAE: Economic Environment, Finance, and Regulatory Landscape

Abderazak Bakhouche (Higher Colleges of Technology, UAE), Randa Elchaar (Higher Colleges of Technology, UAE) and Manal Emam (Higher Colleges of Technology, UAE)
DOI: 10.4018/978-1-5225-9377-5.ch006
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Innovation has an essential impact on SME creation, and governments are concerned with stimulating adoption of innovation by SMEs to strengthen growth and development and adapt to the ever-changing business environment. Innovation by SMEs requires operating within a generally embracing economic and financial environment. The availability of various formal and informal financing options and a growing economy encouraging consumer spending, innovation-driven investment spending and export, and a policy favoring enhancing private equity, economic diversification, and market competition are incipient factors contributing to a culture of private initiatives by entrepreneurs and SMEs.
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Policymakers highly celebrate the role of entrepreneurship and Small and Medium Enterprises (SMEs) in the economy due to the impact on employment, innovation, and social stability. It has become essential for governments to promote an entrepreneurship culture among individuals and innovation among SMEs to seek to strengthen financial position on a global level. As a result, SMEs constitute the mainstay of most economies in the world. SMEs represent more than 95% of registered firms and 50% of employment worldwide and contribute more than 35% of GDP in many emerging markets (Alibhai et al, 2017).

In recent years, driven by the necessity of economic diversification, the UAE government has recognized the multiplier effect of SMEs, and embarked upon a program enhancing the capabilities of the SME sector, particularly in the field of innovation (Issac, 2015). The UAE vision 2021 aims to boost SMEs’ contribution to GDP to reach 70%. A report on SMEs in the MENA region suggests that for every ten successful new enterprises, about $1.5 billion in current valuations and more than 2,500 jobs creation (Alkasmi et al, 2018). This “multiplier effect” of entrepreneurship in the economy showcases the contribution of entrepreneurs and SMEs in achieving a policy's economic and social objectives such as economic stability and development. Flourishing SME ecosystem is essential for a thriving economic and social structure, characterized by better allocation of resources driven by inherent innovation, efficiency, and competitiveness. Entrepreneurship is recognized as an essential factor of innovation and employment, hence leading to economic growth and increased well-being.

SMEs generate most of the new jobs and help diversify a country’s economic base through the promotion of innovation, new goods and services, and integrating women and youth into the economic mainstream. Despite all these benefits, SMEs remain significantly underserved by financial institutions. Research indicates that the credit gap that formal SMEs confront is about $1 trillion (Alibhai et al, 2017). Over ten million of population mostly youth, and a GDP approaching half a trillion USD, the UAE has developed to become a hub of innovation and entrepreneurship in the MENA region. It is increasingly and rapidly embracing the digitisation and digitalisation with evolving institutional, infrastructure, and regulatory framework.

The United Arab Emirates (UAE) has increased its propensity for digital adoption and access to and use of technology. The whole population owns a smartphone device, and 90% of the population connect daily and connects online an average of three hours. The high smartphone penetration rates in the UAE has increased the number of active social media users. More than a third of the population are active social media users (Alkasmi et al, 2018). The demand for digital content and services has resulted from the increase in smartphone penetration and online accessibility.

The oil price slump in 2014 has led decision-makers to re-think growth and development towards increasing the share of the non-oil sector in the economy. The policy is increasingly relying on introducing institutional facilities and promoting the entrepreneurship culture among the youth to move towards a post-oil economy. The SMEs sector employs 42% of Dubai workforce and contributes 40% of the emirate’s GDP. However, the performance of the SME sector seems to lag as reported by Dubai SME’s where access to funding coupled with promoting risk-taking culture (introducing the bankruptcy laws). Policy efforts have looked at reducing unnecessary red tape and regulations concerning setting-up the enterprises with clear post signs. Statistics show that less than 25% of surveyed SMEs used bank finance in the last five years. Personnel money/savings are the dominant source of finance, as 80% of the respondents indicated personal money as a means of financing. In the UAE, SMEs play a pivotal role in the development and restructuring of the economy which leads this fundamental underpinning the economic, private equity, and banking environment describing first, the economic structure of the UAE and surveys the recent trends in economic conditions about SMEs in an economic expansion. Second, a brief analysis of banking performance as a primary source of finance for SMEs. Third, financing options for SMEs in the UAE. There are three central public microfinance schemes available in the UAE: Khalifa Fund for Enterprise Development, Mohammed Bin Rashid Fund for SMEs, and Ruwad Sharjah Entrepreneurship Foundation.

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